Should you pay off your mortgage early?

If you’re lucky enough to receive a cash lump sum or have just saved up a large amount of money over time, then you have the option to pay more than your monthly mortgage amounts or make a lump sum payment.

If you’re on a fixed rate, your mortgage provider will typically let you overpay by 10 percent of the balance a year without charging you a fee (customers on the standard variable rate aren’t usually charged). This means that not only do you have the satisfaction of clearing your debts early, but a smaller balance means you will have less interest to pay.

Should you manage to pay off your entire mortgage early by overpaying for several years in a row, you could reinvest the savings elsewhere such as making increased pension contributions or paying into a high-performing ISA (always seek professional independent advice from a regulated Financial Adviser before making any decision on investments).

However, things get more complicated if you want to pay more than 10 percent in one year, with lenders typically charging you a penalty fee of between one and five percent of the overpayment amount.

For example, if you have a £200,000 debt and you choose to pay off 15 percent of the balance (£30,000), a provider may charge you two percent in fees on the extra £10,000 overpayment – £200. So, before you do anything, speak to your lender about how much their fees are.

There are other factors to consider, too.

If you have other debts with higher interest rates (say, credit cards), it’s probably wiser to pay those off first, especially as mortgage rates are at an all-time low.

Or you may decide to do something else with the money, for example building up a ‘rainy day fund’ which you can use for any emergencies such as home repairs.

Finally, if you’re coming to the end of your current mortgage deal, it might be advisable to negotiate a remortgage with more attractive terms first. That way, you can overpay on your new deal and enjoy smaller repayments at the same time. Our expert mortgage advisors at Charles Cameron & Associates will be able to talk you through your options so that you make the financial decision that works best for you.