Pay off your your current mortgage deal in 10 years!
One in 10 homeowners stand to pay off their mortgage in less than a decade. Fancy becoming mortgage-free by 2020?
The figures sound amazing, unbelievable even. But, according to mortgage lender First Direct, more than 10% of borrowers (11% in fact) are on course to be mortgage-free in a decade.
The burning question is, of course, how? And, more importantly, how can the rest of us pay off our homeloans in the next 10 years?
According to the lender, the answer is a combination of advantageous current mortgage conditions and savvy mortgage choices, enabling borrowers to dramatically bring forward their 'Freedom Day' - the day their mortgage is finally repaid.
In other words, with record low interest rates slashing many mortgage borrowers' monthly repayments you are left with a choice to make. Either enjoy the reduced monthly outgoings and have more disposable income, or maintain your payments at their previous level and overpay your mortgage.
If you were used to mortgage repayments of £1,000 a month for example and they have recently dropped to £750, you can simply maintain your previous payments and effectively overpay by £250 a month.
But why overpay?
By paying more than you need to each month the extra comes straight off your outstanding mortgage debt - which is a good thing in itself. But even better is the fact that, because you have reduced the size of your debt earlier than planned, you have also reduced the amount of interest you will have to pay over the term of the mortgage.
Check that your lender calculates interest monthly or daily. If it calculates interest annually you may not get the full benefits of overpaying
Assuming you can benefit, it gets even better.
Every month you make an overpayment, you reduce the amount of time it will take you to pay off your mortgage and the amount of interest you pay overall.
Effectively it's a virtuous circle; the quicker you pay off your debt, the less interest you will be charged. And this can have massive cumulative effects over the long term.
- Follow the hints and tips in this goal: Cut your mortgage costs and pay off your mortgage early
Big, big savings
For example, if you have a £150,000 repayment mortgage and your monthly repayment is £1,000, it will take you approximately 19 years and five months to repay that debt (assuming 5% interest).
If you decide to overpay £250 a month from now on, and providing the interest rate remains the same, you would repay your mortgage in 13 years and 10 months. In other words you would shave five whole years and seven months off your mortgage term.
Even better, you would massively reduce the total amount of interest you have to pay your lender over your mortgage. In total, you would save a whopping £26,950.
So you save not only time, but a significant amount of money to boot. (You can work out the impact of overpaying your own mortgage quickly and easily with lovemoney.com's free overpayment calculator.)
Why wouldn't you overpay?
Well, you might not have the money.
If you would really struggle to overpay, it is not a good idea, especially if you are sacrificing other monthly commitments in order to do it.
As a rule of thumb it usually makes sense to pay off your most expensive debts first.
Secondly, assuming you do have the extra money to overpay, you may prefer to keep that cash in a savings account.
In ordinary, or benign, economic conditions this is not usually the best idea because savings interest rates are generally lower than mortgages rate. Therefore your money usually works harder repaying your mortgage interest than it does earning a lower rate of interest on your savings -- which you are then taxed on, reducing it further!
However, because some borrowers (such as those with existing tracker deals) have exceptionally low mortgage rates at the moment, they might be better off keeping their spare cash in savings.
- Watch this video: How to invest your first stocks and shares ISA
Work it out
Working out whether you should overpay your mortgage or not on a purely financial basis is actually easy -- it simply comes down the rate.
If not, put your money in the savings account.
But you should think about more than just pure finances. When you overpay a mortgage you cannot always take that money out again. If you have a fully flexible mortgage you may be able to underpay or borrow back any overpayments you have made. But sometimes it's not possible, and if you think you may need future access to your savings, overpaying might not be a good idea.
An offset mortgage gets around this problem by allowing you to 'effectively overpay' your savings without actually losing them.
Rather than physically overpaying money into your mortgage, you simply link up your savings to your mortgage account. The offset provider treats this money as one giant overpayment on your mortgage, and charges you less interest accordingly.
But crucially you don't actually overpay your savings. They sit in a separate account and you still have access to them. So you get the best of both worlds.
And maybe, just maybe, you too can be mortgage free in a decade!