When you can afford to pay off your mortgage in advance of time, you’ll save some money on the interest of your mortgage. In fact, paying off your mortgage one or two years early might potentially save you hundreds, or even thousands, of pounds. So if you’re going to take that path, you’ll need to know, among other potential things, what mistakes to avoid when paying off your mortgage early and if you can avoid paying any penalty charges.
Avoid: Not Considering All of Your Options
It can be very enticing if you get some extra money to pay off your mortgage ahead of time. However, getting out of debt a little sooner may not be the most remunerative option to make. Let’s look at an illustration to demonstrate this.
Let’s assume you are considering making a one-time payment of £20k towards paying off your mortgage. If your original loan amount was £200k and you are 20 years into a 30-year contract, and your interest rate is 4%. Paying £20k towards the total of the mortgage balance in one go could save you around £8k in interest and could mean you could pay it off its entirety 2 and a half years sooner.
That sounds fantastic, but let’s look at an alternative. When you invested the money in the S&P 500 index fund, which offers a rate of return of 9.8%, you will receive £30.9k in interest in the same ten years. Even a more modest estimate of your rate of return, say 4%, will give you a gain of £125k in interest alone.
Avoid: Not Putting Extra Payments Towards the Mortgage
Throwing in an additional £500 or £1,000 per month does not automatically help you pay off your mortgage more quickly. Unless you agree that the additional money you pay is to be deducted from your overall debt, the lender may use it to pay interest for the next scheduled payment.
Avoid: Not Asking If There’s a Prepayment Penalty
Mortgage providers are in the game of making money. One of the ways they make their money is by charging you interest on your loans and mortgages. If you prepay your mortgage, you effectively cost the lender money. That’s why some borrowers are seeking to make up for lost income by imposing a prepayment fee.
Avoid: Leaving Yourself Cash-Poor
Throwing every single penny you have on your mortgage is an effective way to get out of debt. However, this might backfire when you don’t have something set aside for emergencies.
You could end up in an extremely tight spot. Especially if you get sick and can’t work for a couple of months. In this scenario, you can need to use your credit card to pay your bills or seek to get an additional loan.
Avoid: Extending Your Loan Term When Refinancing
Refinancing will save you money in a variety of ways, allowing you to move to a shorter or longer loan period, depending on what’s best for you. So if you’re ten years into a 30-year mortgage contract, you might actually refinance for a 10-year period and shave off ten years. On the other hand, you might go for another 30-year duration to reduce your monthly payments.
We hope you’ve found some useful hints and tips on what mistakes to avoid when paying off your mortgage early. With the right approach, you could reap the rewards.