When taking a mortgage, the repayment schedule and amount differ, with some borrowers preferring agreements that allow smaller repayment amounts and if possible, fewer repayment periods. Other borrowers however, prefer mortgage agreements that are geared towards faster repayments, featuring larger repayment amounts, more frequent repayment periods, and even clauses that allow extra payments without extra fees.
The debate on whether it is advisable to repay a mortgage early or take the normal 30-year duration has intensified in recent times with both sides offering string arguments supporting their positions. However, paying off your mortgage early offers distinct financial advantages. We will discuss some of them.
Quicker repayment saves money
Loan payments are in two parts: the principal and the interest. The principal is the actual amount borrowed while the interest is the cost of borrowing. Although repaying your mortgage faster has the added stress of an increased monthly payment, it reduces the net amount that you would pay as interest. Using a mortgage payoff calculator, we discovered that if you added £100 to a £1,000 monthly prepayment amount on a £200,000 mortgage at 4.5% interest per annum, you end up paying a total of £333,746 instead of £364,814, saving £31,746 and repaying your mortgage 5 years 6 months early. If the monthly repayment was increased by £200 instead, total payment becomes £312,056, saving £52,756 and repaying the mortgage 8 years 10 months early. Interest savings will be smaller the longer you take to pay off your mortgage.
Take advantage of current low mortgage rates
According to the Bank of England statistical Database, mortgage rates are at 0.25, which is the lowest they have been in years. At lower interest rates, mortgage repayments are cheaper if the if the mortgage taken on an Adjustable rate mortgage. This means that interest repayments are cheaper if a larger proportion of the mortgage is paid off faster paid off faster than if paid slower and potentially becoming more expensive in the event of a future increase in mortgage rates.
For most people, mortgage repayments are their single biggest monthly expense. The faster you repay your mortgage, the faster you are able to free up your income to save more or to invest. Owning a home without a mortgage gives you the financial freedom to utilize money that previously went to mortgage repayments into savings, or to pursue a lifelong dream.
Reduce risk of defaulting and eventual foreclosure
Financial conditions and income flow are not set in stone. Meeting your monthly repayments is dependent on a steady source of income, a job for example. In the undesirable but possible event that you lose your job in future, you run the risk of defaulting on your mortgage payments and losing your home. Paying off your mortgage faster reduces the risk of a job loss coinciding with hefty mortgage payments since the faster you repay your loans, the quicker you become debt free.
Paying off your mortgage early should be a major priority for any homeowner. However, it is important to balance mortgage repayments with other financial responsibilities so that you do not end up sacrificing one for the other. It is advisable to contact a mortgage professional for expert advice.