Should you pay off your mortgage early or keep your cash? The pros, the costs and what to check before you decide.
A mortgage is most people’s biggest debt. So when you have spare cash, it is natural to ask if you should clear it sooner.
The short answer: it can save you a lot of interest, but it is not always the best use of your money. It depends on your mortgage rate, any fees for paying early, your savings and your other debts.
This guide sets out the pros, the costs and what to check before you decide.
Early repayment charges. Most fixed and tracker deals charge a fee if you pay off too much during the deal. The fee is often a percentage of what you repay, and it tends to fall each year of the deal. Many lenders let you overpay up to 10% of the balance each year without a charge. Check your mortgage offer or ask your lender for the exact terms.
Your savings may earn more. Compare your mortgage rate with what your savings earn after tax. If savings pay more than your mortgage costs, keeping the cash may leave you better off. If your mortgage rate is higher, paying it off often wins.
You need a safety net. Money paid into your mortgage is hard to get back. Most people keep three to six months of spending in an easy access account first.
Other debts cost more. Credit cards, car finance and personal loans often charge far more than a mortgage. Clearing those first usually saves more.
Your pension may be a better home for spare cash. Pension payments get tax relief, and your employer may add more if you pay in more. The money is locked away until later in life, so weigh that up too.
Regular overpayments. Add a set amount to your monthly payment, within your lender’s yearly limit. Small sums make a difference over time.
A lump sum. If you have a bonus, an inheritance or savings you won’t need, you can pay some off in one go. Time it with your deal’s limits, or wait until the deal ends when there is often no charge.
A shorter term when you remortgage. When your deal ends, you can choose a shorter term. Your monthly payment goes up, but you pay less interest overall. A broker can show you the numbers side by side. See our remortgage advice page.
An offset mortgage. Your savings sit next to your mortgage. You don’t earn interest on them, but you don’t pay interest on that part of the loan either. You can still get at your money if you need it.
Try our mortgage calculator to see how a different term or loan size changes your payments.
If your deal ends soon, it is a good time to look at your options. Call us on 01332 300300. We advise clients in Derby and Derbyshire and the rest of the UK, by phone, video call or at our office.
It depends on the rates. If your mortgage costs more than your savings earn after tax, overpaying often saves more. Keep an emergency fund either way.
Many lenders allow up to 10% of the balance each year during a fixed or tracker deal. Limits vary, so check your mortgage offer.
Some lenders lower your payment. Others keep it the same and shorten your term. Ask your lender which applies to you.
Usually not, unless your mortgage has a payment holiday or borrow back feature. Treat overpaid money as spent.
Often when your deal ends, as there is usually no early repayment charge then. It is also a good time to review your whole mortgage.
That is a different question with its own risks. Read our guide: Should I use my mortgage to pay off my debt?
Your home may be repossessed if you do not keep up repayments on your mortgage.
This guide is general information, not advice. Please speak to an adviser about your own situation.