How to live mortgage free
The average mortgage costs £45,000 in interest over 25 years. Clear it early and not only will you have peace of mind knowing you own the roof over your head, you’ll also save yourself tens of thousands of pounds in interest. Here’s how to do it.
Government figures show that the average mortgage-holder paid just over £8,000 last year in mortgage repayments. Clearing your mortgage will mean you have a lot more money in your account every month. Plus, you’ll save yourself a small fortune in interest payments. The average mortgage debt in the UK is £123,000, according to the Council of Mortgage Lenders. With an average interest rate of 2.63% that means the average homeowner paid £3,154 interest on their mortgage last year.
That means that making the effort to repay your mortgage early will save you thousands of pounds. Here are four steps to live mortgage-free.
1. Lower your interest rate
The lower your interest rate is the quicker you’ll be mortgage free. That’s because if you’re paying less interest you can afford to pay off more of the initial amount you borrowed.
For example, someone with a £123,000 mortgage on the average 2.63% interest rate is making monthly repayments of £560. If they remortgaged onto a 1.63% interest rate their repayments would drop to £499. BUT, if they remortgaged onto the cheaper rate AND kept their repayments at £560 they would shave three years and three months off their mortgage, saving a huge £3,686 in interest.
2. Remortgage regularly
Shopping around for a new mortgage deal regularly will mean you are always on the lowest possible interest rate. Set a reminder in your calendar for two months before your current mortgage deal ends to start looking for a new one.
The other reason you should remortgage regularly is because your loan-to-value (LTV) will change every few years meaning you may be able to get a lower interest rate even if rates in the broader market haven’t moved much.
For example, say you bought a £250,000 house with a £200,000 mortgage. When you took out the deal you had an LTV of 80%. That means the bank has loaned you 80% of the value of your home. With a 25-year repayment mortgage at a 2.5% interest rate after three years you would have paid off £18,000. Assuming annual house price growth of 5% your house would now be worth £290,000. That means your LTV would have dropped to 63%. A lower LTV will give you access to better mortgage deals with lower interest rates. That will help you clear your debt faster.
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The absolute key to paying off your home loan early so you can live mortgage free is to overpay your mortgage. As you saw in step one, even just paying an extra £60 a month could put you three years closer to being mortgage free.
There are two ways you can overpay:
- You could choose to increase your monthly direct debit by an affordable amount.
- You could pay off a lump sum.
Let’s look at what an overpayment would do to a £150,000 mortgage with a 25-year term at 2.5%. A £20,000 overpayment would save you £15,311 in interest. You would also clear your debt four years and four months earlier. Alternatively, paying an extra £150 a month would save you £13,000 in interest. You would pay off your debt almost six years early too.
But before you start throwing money at your mortgage provider check your paperwork. Most mortgage deals have a limit on how much you can overpay by. There may also be fees associated with overpayments.
Also, make sure you can afford your overpayments. You don’t want to end up with all your savings tied up in your house. Read our guide Should I pay off my mortgage? which explores the pros and cons of using your savings to pay your mortgage off in full.
4. Offset your savings
If you don’t want to lock your savings away in your house an alternative option is to get an offset mortgage. You put your savings into an account tied to your mortgage. Then the balance of the account is deducted from your mortgage when interest is calculated. Just be aware before doing so that wouldn’t receive any interest on your savings.
For example, if you have a £200,000 mortgage and £25,000 in a linked savings account, you’ll only pay mortgage interest on £175,000. On a 2.5% mortgage interest rate you’d save £19,000 in interest. You would also repay your mortgage two years early. So well worth considering!