Guide to Paying Off Your Mortgage

If you are in the position to repay your mortgage or make overpayments on your mortgage, you may be wondering how to go about it and if it is a good idea. In most cases, paying off your mortgage, partially or in full, is a great idea, however you may encounter unexpected pitfalls along the way.

Most lenders prefer you to keep a mortgage in place because it is more profitable for them to continue charging interest. Likewise, the majority of lenders also prefer to restrict your ability to make overpayments on your mortgage because the higher your borrowing, the higher your interest payment.

Let’s explore how to make overpayments with our guide to paying off your mortgage.

How to Pay off a Mortgage

If you find yourself in the fortunate position to repay your mortgage in full, you should contact your mortgage broker to ascertain the process and any fees applicable.

You may wish to repay the loan in full or make partial overpayments on your mortgage to reduce the capital outstanding.

Lenders will normally allow you to make overpayments on your mortgage up to a certain amount, without penalty. However, some lenders do not allow overpayments without charging an Early Repayment Charge.

Even those lenders that allow payments up to a threshold will charge an Early Repayment Charge for any payments above the threshold.

The Early Repayment Charge may also be applicable if you are repaying your mortgage in full depending on how far you are into your mortgage and whether you are on a Standard Variable Rate or not.

Early Repayment Charges

There are few times where being on a Standard Variable Rate is preferable to being on a lender’s product interest rate (such as a fixed or tracker rate). Repaying your mortgage is one such instance because lenders typically do not apply an early repayment charge when you are on the Standard Variable Rate.

If you are still tied into your fixed or tracker rate, repaying the mortgage will normally incur an Early Repayment Charge.

Early Repayment Charges are prohibitive fees applied by lenders to reduce the incentive of repaying the loan. You may feel like this is an unfair practice, but in truth, it is the only way mortgage lenders can continue lending.

For example, if no early repayment penalties existed, borrowers could theoretically take mortgage products to cover short term financing on a property and repay the loan penalty free. This would mean lenders are unable to make enough profit to make offering the mortgage worthwhile. As a result, the entire mortgage market would be uncompetitive.

How Lenders Apply Early Repayment Charges

Some lenders do not have Early Repayment Charges, these tend to be major lenders who have enough mortgages on their book to offset the risk of borrowers repaying the loan early.

Most lenders have Early Repayment Charges and how they operate them is different between lenders. Some lenders will not allow any form of additional repayment without incurring a charge and others will allow you to repay up to a percentage (for example up to 10% of the balance per annum) without penalty and any overpayment beyond this incurring the charge.

The type of charge varies between lenders with some charging a percentage of the loan value and others having a fixed fee. For example, you may have a lender that charges 5% of the mortgage balance as an Early Repayment Charge. In the event the mortgage balance is £100,000, the Early Repayment Charge in this instance would be £5000.

Exit Fees

Irrespective of if you incur an Early Repayment Charge, most lenders will charge an exit fee if you repay a mortgage in full.

Exit fees are normally nominal fees that cover the cost of administration. For example, your lender might charge £80 for exiting the mortgage product.

Benefits of Paying off a Mortgage

The benefits of paying off your mortgage are substantial, and it should be stressed that wherever it is financially sensible, it is best to repay your mortgage.

By repaying your mortgage in full – you will be mortgage free with no ongoing monthly mortgage payments and the ability to live without the debt hanging over you. Repaying the mortgage in full also reduces the overall cost of the borrowing because you will save yourself any outstanding interest that would have been charged had you kept the mortgage.

By making overpayments on your mortgage – you will be reducing your overall borrowing cost. This is because you will reduce the capital and in turn reduce the amount of interest chargeable on your loan.

You are also increasing the amount of equity you hold in the property, which can be advantageous if you wish to sell the property or remortgage onto a lower interest rate.

Drawbacks to Paying off a Mortgage

There are three main drawbacks to repaying a mortgage.

Fees and Charges – By repaying your mortgage you could incur significant charges that make a full repayment impossible or financially unattractive. If you find you have a hefty Early Repayment Charge you may wish to hold off on repaying your mortgage until the deal term has expired and the charge is no longer applicable. Sometimes, waiting a couple of months can save you thousands of pounds.

Savings Rates vs Debt Rates – You may find repaying your mortgage does not make financial sense. This occurs when your borrowing interest rate is lower than the amount you are generating from savings. For example, if you were lucky enough to take a mortgage during the COVID 19 pandemic, you may have an interest rate around 2%. With savings rates currently exceeding that 2% you would in this circumstance be better off keeping your money in savings.

Title Deeds – Most property title deeds are electronic, however there still exist paper title deeds. When a property is sold, paper title deeds are converted to electronic deeds held with the Land Registry. If you have paper title deeds still, once you pay off your mortgage, you will need to arrange secure storage of those deeds.

Best Time to Consolidate a Mortgage

As with repaying your mortgage, the best time to consolidate a mortgage is after your product term has expired and no Early Repayment Charges can be levied.

If you are on the Standard Variable Rate this is the ideal time to consolidate your mortgage. If you find you are still within your product term, you should discuss your personal situation with a mortgage broker. This has two advantages, the first being your broker will be able to advise on the exact cost of consolidating your mortgage.

The second advantage is that your mortgage broker will be able to line up the consolidated mortgage to be concurrent to your deal term ending. This means you avoid being moved to the (more expensive) Standard Variable Rate and do not pay any Early Repayment Charges.

Is it Better to Pay off a Mortgage or Save?

For anyone financially savvy, it is best to compare the interest rate on your debt to your savings interest rate.

In the simplest terms, if your interest rate on your debt is higher than the rate on your savings it is best to focus on repaying the debt. Conversely, if your interest rate is higher on your savings, you should consider keeping the money in your savings as the debt costs less than your savings generate.

There are two major caveats to this rule.

1. The amount of capital should be considered. For example, if you have savings of £10,000, the interest gained even on a generous interest rate would be minimal compared to a mortgage debt cost of £100,000.
2. If you are anticipating the cost of debt increasing in the near future, it might still be preferable to repay the debt, even if your savings rate is currently high. This is because your anticipated costs would be higher than your savings benefit.

Savings are only a small portion of the picture nowadays and many people are investing money in increasingly diverse ways.

For this reason, it can be difficult to discern how much of an investment would make compared to the cost of existing debt. If your savings are not held in a traditional savings account or a portion of your savings are invested, you should discuss the situation with a financial adviser who will give you a better understanding of whether to pay off your mortgage.

In any case, even if you have significant savings with an attractive interest rate, for some the opportunity to repay the mortgage and relieve themselves of the ongoing stress is preferable. A good question to ask if you are considering repaying your mortgage is ‘how much is being debt free (stress free) worth?’

Speak to an Expert

Repaying a mortgage is often the most exciting financial milestone for anybody. Being able to relax in a property you own outright with no ongoing monthly cost is a dream that some people will never realise.

It is without question a huge financial commitment and you should always discuss repaying your mortgage with a mortgage broker.

Boon Brokers is a Whole of Market Mortgage, Insurance and Equity Release Broker. Boon Brokers provides fee free mortgage advice.

Book your consultation and discuss repaying your mortgage with Boon Brokers today.