Is reducing the term of your mortgage money well spent?

by Kirsty Fulton
Communications Executive moneyQuest

18 January 2008

Nowadays, UK lenders seem to be stretching their loan terms longer than ever before to accommodate the growing number of borrowers struggling to get a foot on the property ladder. 

Despite this, there are borrowers who want to reduce the term of their mortgage and pay it off early.  Being mortgage-free is definitely something that sounds appealing, but is it really money well spent?

Advantages of reducing your mortgage term

Other than just being mortgage free, there are some definite advantages to paying off your mortgage early.  It’s more money in your pocket because you’ll pay the lender less money in interest over a shorter term.  You will also give yourself the opportunity to invest elsewhere by freeing up money that would have otherwise been spent on mortgage payments.  Another key benefit is that you will own your home sooner and be liberated from possibly your biggest debtor.

Get the right mortgage

In light of these advantages it makes sense to pay off your mortgage early.  Lenders, however, have other ideas.  It’s not in their best interest for you to pay back your mortgage early so they don’t always make it easy for you!  Early Repayment Charges and Redemption Penalties are standard on most mortgages nowadays – these are the lenders safety nets which allows them to recuperate some of their money if you decide to pay off your mortgage quicker.

However, there are products that are specially designed for people who believe they could repay their mortgage early.  You’re likely to pay for this privilege with higher Interest Rates but these costs will likely be outweighed by the overall savings you would receive by paying off your mortgage early. 

Not everyone has the potential to make overpayments and reduce the term of their mortgage but if you think you could, it’s important to speak to your financial advisor and set up the right mortgage with this in mind.

Ways to reduce the term of your mortgage

Lump sum payments
Making regular lump sum payments to your mortgage is an obvious method to repay your debt sooner and reduce the term of your borrowing.  The majority of the UK’s biggest lenders now offer Flexible mortgages that allow the borrower to do this without being penalized.

Early payments
In the same way lump sum payments can reduce your mortgage term, making early payments can also help you to pay off your mortgage sooner.  Making extra payments allows you to reduce the mortgage capital and also the interest on your debt so you can pay it off faster.

Flexible mortgage
Not all products give you the flexibility to make overpayments to your mortgage. To be able to make lump sum and early payments, it’s important that you have a mortgage that allows you to do this.  Flexible mortgages have grown in popularity over recent years, with more lenders offering these products. 

The level of Flexibility differs with each product and lender.  Before signing up, it’s important to know the full terms and conditions of your mortgage.  It’s important that the interest is calculated daily, so you can get the benefit from any overpayment as soon as you pay it. 

Offset mortgage
An Offset mortgage can also give you the potential to pay off your mortgage early.  This product combines all your accounts into one so you can use the money in your savings or current account, to ‘offset’ the balance of mortgage and reduce the amount of interest you pay.  Reducing the amount you need to pay means you can shorten the term and be mortgage-free sooner.

It doesn’t have to mean beans on toast for life

The benefits of reducing the term of your mortgage are clear and there are many ways you can do this.  Don’t worry, making overpayments doesn’t have to mean beans on toast for life! 

A good financial advisor can help you to prepare a strategy to pay off your mortgage faster while allowing you to maintain your existing lifestyle.   Small changes to the way you structure your finances can make a big difference to the way you pay your mortgage, these could take years off the lifetime of your mortgage and save you thousands of pounds in the long-run.

Article Approval Ref: H0093491