Why pay tens of thousands in interest payments when that money could be spent on almost anything more exciting?
If you’re able to reduce the length of your mortgage term or make overpayments, the financial rewards could be huge.
Senior Mortgage Adviser for Natwest, Michael Gyapong, takes us through the top five ways to pay your mortgage off faster.
1. Shorten your repayment term
When calculating what you can afford to pay each month, mortgage lenders tend to use a standard repayment term of 25 years. But this is by no means set in stone.
So long as you can afford the higher monthly repayments, you can take out a mortgage for as little as five years. And the shorter the term you choose, the cheaper it will be overall.
For example, if you borrowed £200,000 over 25 years at an interest rate of 3%, your repayments would cost £948 a month. That means you’d pay £84,527 in interest back to the lender.
If you shortened the repayment term right down to five years, your monthly repayments would shoot up to £3,594. But the total interest you'd pay would be just £15,624.
‘A lot of homeowners don’t know that they can refinance their mortgage to a shorter term, so they can pay it off sooner', says Gyapong. 'Or make overpayments so that they reduce their balance earlier.
‘Many people use their disposable income to spend money on luxuries like takeaways or shopping.
‘But if that money was spent on their monthly mortgage payments instead, it could save tens of thousands of pounds in interest over the term of the mortgage.
‘I recently helped a first-time buyer who was looking at a 35-year mortgage term because they thought that’s what everybody does.
‘When we looked at their budget, we were able to reduce the term to 19 years and 11 months. That was without stretching their finances and leaving them with a comfortable spending budget each month.
‘It saved them £35,000 in interest - and that’s a lot of money.'
You can apply to reduce your mortgage term at any time, even if you’re tied into a fixed rate.
A small fee may be applicable and lenders may carry out affordability checks as part of your application, to make sure the new payments are affordable for you.
Do your sums and see what length of term you could afford. If you need help, contact an independent fees-free mortgage broker.
2. Pay back a little extra each month
Upping the amount of your monthly mortgage direct debit – even by just a fraction – will also have the effect of shortening your mortgage term and reducing the total amount of interest you pay.
Most banks and building societies allow you to overpay up to 10% of your outstanding loan amount every year without penalty, even if you're locked into a fixed rate deal. Call your lender to find out more.
‘Customers who are not tied into a fixed rate can overpay without any charge,’ says Gyapong.
‘Savvy customers will use their 10% allowance and then, before fixing on a new deal, will make an additional overpayment before they secure a new rate, ensuring they don’t pay any additional charges.
‘This helps to pay off the mortgage balance quicker and can also potentially help to secure a cheaper interest rate.’
3. Pour in any financial windfalls
Instead of (or as well as) chipping away at your mortgage by overpaying a little each month, pour in any one-off lump sums such as a work bonus, share dividends or an inheritance.
It will have a similar effect when it comes to reducing the total amount of interest you pay.
You’ll need a fully flexible mortgage though, if you want to do this without penalty. This is because it will count as an overpayment, which standard mortgages tend to cap at 10% of your outstanding balance each year.
4. Consider an offset
Rather than pour it into your mortgage, you might prefer to keep hold of any savings pot for a rainy day. However, you can still use this cash to reduce your mortgage debt.
Offset deals take your total savings balance and effectively subtract it from your mortgage debt – only charging interest on the remainder.
For example, if you had a £200,000 mortgage and £20,000 in savings, you’d be charged interest on a balance of £180,000.
The long-term result of this arrangement is that you pay less interest overall and – even if you keep your monthly repayments the same – clear your debt faster.
Your savings will need to be held with the same bank or building society as your mortgage debt for the arrangement to work and you won’t earn interest on your savings.
But, compared with the amount you are saving in debt interest, it’s still very likely to make financial sense – especially when coupled with the fact you won’t be paying any tax on interest you would have otherwise earned.
5. Switch to a better mortgage deal
You don’t have to use your hard-earned cash at all to be rid of your mortgage debt quicker – you can simply ensure you’re paying the lowest interest rate possible.
That means shopping around when looking for your first mortgage, or when you come to the end of your current deal, such as a fix, discount or tracker.
Bear in mind that many of the lowest mortgage rates advertised come with the highest set-up fees, so be sure to factor these in.
‘Mortgage products with fees reduce the interest rate charged,’ says Gyapong. ‘But depending on the mortgage balance and the interest saved, it may not always be cost effective to take out a fee-paying product.
‘Remember, if you choose to add the cost of the fee to your mortgage to help you secure a cheaper rate, you'll also pay interest on the fee amount.’
Even though you're already a homeowner, your credit score will still be considered when you apply for a new mortgage, so it's wise to keep yours in check.