Should I pay off my mortgage?

Every mortgage borrower dreams of the day they no longer have to fork out those monthly payments to their lender, being able to spend the money how they wish while owning their home outright. But if you do have a lump sum, is it always best to pay off all or even part of your mortgage early?

The benefits of paying off your mortgage

Paying off your mortgage early could reduce the amount of interest you pay overall and leave you with lower monthly outgoings.

You will own your home outright, which can offer security.

Being mortgage-free may also give you more financial flexibility, for example if you want to reduce your working hours.

Disadvantages of paying off mortgage early

• You may have to pay an early repayment charge
• Your money could potentially earn a higher return elsewhere
• It can be difficult to access the money again once it has been used to repay your mortgage
• You could miss out on other tax-efficient uses of your money

Firstly, check whether you would need to pay an early repayment charge if you repay some or all of your mortgage early. These charges can run into thousands of pounds. See our guide for more information on early repayment charges.

You should also consider what else you may need the money for. Once savings have been used to repay your mortgage, they will no longer be readily available for other costs or investments.

It may also be difficult to access the money again without borrowing against your home. And if your income or circumstances have changed, you may not be able to borrow as much as before.

Depending on your circumstances, there may also be other uses for the money, such as contributing to a pension, which can have tax benefits.

What’s right for you will depend on your circumstances, so you may want to speak to an independent financial adviser.

What do I need to consider when deciding to pay off some or all of my mortgage?

• What is the interest rate on your mortgage, is your mortgage rate likely to go up or down and how does it compare to the interest you can get on a savings account?
• Would you need to pay an early repayment charge?
• Are you expecting any windfalls, such as selling a business, or inheritance?
• Do you have other plans for the money – e.g. investing in property, or building up a business?
• How much money do you need for a rainy day fund? Consider whether using the money to repay your mortgage would leave you with enough accessible savings for unexpected costs.
• What costs are you expecting? If you have years of school fees ahead of you, you might want to keep a large ring-fenced sum aside so you know you can to cover them, rather than paying off the mortgage.
• Could your income fall in future? If so, keeping some accessible savings may give you more flexibility.

Need advice on whether to pay off your mortgage or invest your funds instead? Our partners at Unbiased connect you with local independent financial advisors to help you assess your options. 

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How do I work out how much money I will save by paying off the mortgage?

Start by finding out how much mortgage interest you would save if you paid off some or all of your mortgage early.

Then look at what you would give up by using your savings to do this. For example, if that money is currently in a savings account, you would no longer earn interest on it. You should also take into account any tax you may need to pay on savings interest. You can check the latest rules on tax on savings interest on GOV.UK.

If the mortgage interest saving is greater, paying off your mortgage could leave you better off financially.

However, this isn’t the only factor to consider. You should also take into account any early repayment charges and factors including whether you want to keep some of your savings readily available for emergencies or other costs.

Will I be better off using the money to buy something else?

Possibly. You may be able to earn a higher return by keeping or investing the money elsewhere instead of using it to pay off your mortgage.

However, what is appropriate will depend on your circumstances and attitude to risk so it’s a good idea to get independent financial advice.

How do I find out about any penalties?

If you are in the middle of a discounted or fixed-rate deal, you may need to pay an early repayment charge if you pay off some or all of your mortgage early.

Check your mortgage terms or ask your lender whether an early repayment charge applies and how much it would be. Many mortgage deals allow you to make a certain amount of overpayments without a charge, but the amount and rules vary by lender and product.

Do I have to pay off the whole mortgage?

No. You could choose to make a partial repayment instead. This could reduce your mortgage balance and may reduce your monthly repayments or help you repay your mortgage sooner, depending on how your lender applies the overpayment.

If you’re considering using a large proportion of your savings, also think about how much you want to keep readily available for emergencies and other costs.

Will paying off my mortgage affect my ability to move home?

Paying off your mortgage can make moving home simpler if the proceeds from selling your current property are enough to buy your next home outright.

However, if you need to borrow to buy your next home, you would still need to apply for a new mortgage in the usual way.

Should I accept my parents offer to pay off my mortgage and for me to pay them instead?

This will depend on the terms your parents are offering and both sides’ circumstances.

A family loan may be more flexible than borrowing from a mortgage lender, but it is still important to agree how much will be repaid, whether interest will be charged and what happens if circumstances change.

If the interest charged by your parents is lower than your mortgage rate, this could reduce your borrowing costs. However, both you and your parents should consider the wider financial and legal implications.

You may both want to get independent financial advice and legal advice before setting up a family loan.

What happens at the end of of your mortgage term?

When you get to the end of your mortgage term, what happens depends on whether you have a repayment or interest-only mortgage or if your current fixed deal is coming to an end. For more on what to consider for each of these positions, see our guide: End of mortgage term: what happens next.