Having a mortgage takes a huge toll on your finances every month.
Your monthly payments lower the amount of money you can save or invest for retirement, while also keeping you stressed with your debt.
You can pay off your mortgage faster by increasing the amount you pay on a monthly basis. This in turn would lower your interest rate and you can direct even more money towards your home loan.
If you have a windfall or just found out better ways to save money, put these funds towards your mortgage and you’ll see some huge progress.
Paying off mortgage early advantages
Let’s see what happens if you decide to pay off your mortgage early:
You could shorten the length of time it takes to pay off your debt, and reduce the overall interest.
Let’s suppose initially, you took a mortgage for 30 years for a principal sum of £ 150,000, and let’s also assume the payment terms applied Adjustable rate mortgage of 2/28 with a fixed interest rate of 1.79% and a variable rate of 5.2 %.
This means that you would be paying interest for the first 2 years at a fixed rate and the remaining 28 years at a variable rate.
Calculating this would give you a monthly repayment of £360 for the first two years and subsequently you pay £537 per month for the next 28 years.
At the end of 30 years, your total repayments would be £189,072 meaning overtime you paid 26% on your initial loan.
Now let’s suppose you decide to shorten your mortgage period to 15 years and the same interests rate and conditions applied, this would give you an interest saving of approximately £52000 that’s about 58% reduction in your total interest, which is actually a very good bargain especially if you have the cash to make the extra monthly payment.
Paying off your mortgage early gives you a huge sense of accomplishment and also clears a lot of money for better use in the following years.
Paying off mortgage early disadvantages
You can get into financial distress, if your mortgage takes up too much of your income.
In order to pay off your mortgage you’ll need to make a huge financial effort.
If your mortgage is already more than 30% of your monthly income, this can get you into big money troubles, if you get a financial emergency to take care of.
You can avoid this, by keeping an emergency fund around and making sure your mortgage payments don’t get you in more trouble.
You’ll save less for retirement
There are people who put off retirement saving until they clear out their mortgage, which is a mistake. You need to make the most out of your retirement savings plan and this takes years to show results.
So, while paying off your mortgage, max your 401(k) and any other retirement investment plans.
You might keep more expensive debt
If you have credit card debt or any type of high-interest loans, make sure you pay them off as well. Your mortgage has a small interest rate, since it’s stretched on many years, but your credit card debt can turn out to be way expensive, because of the huge fees and interest rates.
Putting all the above into consideration it might be a better idea to avail yourself of other means of repaying your mortgage
You could consider refinancing your mortgage using another finance house with better interest rates.
That way you can pay off the existing mortgage and your new plan avails you smaller monthly repayments for the duration of the loan. Bear in mind that there is usually a penalty fee charged for paying off your loan on time
Another way to balance your mortgage without getting into more financial trouble is to apply for an offset mortgage which entails using your savings to pay off part of your mortgage. This is used to reduce the principal and give you a lower interest rate.
So, what would you choose? To pay off your mortgage early or try and take care of other financial emergencies as well?