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What are the pros and cons of repaying your mortgage early?
The idea of repaying your mortgage and owning your home outright is hugely appealing. Paying off your mortgage gives you the security and peace of mind of knowing that your home is finally yours. However, there can also be downsides to using your savings to repay your mortgage. This article looks at all the pros and cons of paying off your mortgage early.
The advantages of paying off your mortgage early
Paying off your mortgage either through overpayments or a lump sum would seem to have lots of advantages.
Firstly, using your extra money to repay your home loan could have financial benefits. In many cases, the interest that you will be paying to your mortgage lender will be higher than the interest rate you can earn on your savings. In simple terms, this means that it is more cost effective to pay off the loan at a higher rate than it is to generate interest at a lower rate on your savings.
This is particularly true if you are taxpayer. For example, if your mortgage interest rate is 4%, a basic rate taxpayer would need to find a savings account paying 5% to achieve a higher interest rate than what they are paying on their mortgage. A higher rate taxpayer would need an account paying 6.7% while an additional rate taxpayer would need an account paying around 7.3%.
Paying off part or all of your mortgage early is also useful if you come to remortgage or move at a later date. If you have reduced the loan-to-value by repaying part or all of your home loan, you will be able to access much lower interest rates if you do have to borrow in the future. Many lenders offer their best rates to consumers looking for less than 60% loan-to-value.
Paying off your mortgage early can also have psychological benefits. You shouldn't underestimate the security and peace of mind you will feel knowing that you don't owe your bank any money and that you own your home outright.
Why you might not want to pay off your mortgage early
While there are lots of reasons you may want to repay your mortgage early there are also several factors you should consider.
The first is whether you will incur any charges for paying off your mortgage. If you are on a fixed or discounted rate deal you may have early repayment charges. Check with your lender if they will levy any fees and, if they will, you might want to wait until your special deal has expired before making your repayment.
Another factor you should consider is whether you can pay off any expensive debts before you repay your mortgage. If you have any personal loans, credit cards or store cards then it is likely that the interest rate on these is higher than it is on your mortgage. It could make financial sense to repay your more expensive debts before you pay off your mortgage.
If you want to commit a lot of savings to repaying your mortgage, then you should also bear in mind that your spare cash will be tied up in your property. Experts recommend retaining some cash readily available as an 'emergency fund' because if you do need any money at a later date, you may be forced to remortgage. Remortgaging can take time and with stricter lending criteria, it may not be as easy as you think to release the cash you need.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
Lastly, you may wish to consider using funds to maximise pension tax relief or ISA allowances and investing for growth. A cash flow modelling tool can assist you by giving you a visual representation of your finances and ultimately maximising your savings.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen
Think carefully before securing other debts against your home.
Your home may be repossessed if you do not keep up repayments on your mortgage.