Category: Mortgages

Pros and Cons of Paying your Mortgage off Early

These days there are many people considering paying off their mortgage early. With interest rates still at a record low, repayments are not that difficult to manage for some people so they have money left over that they can use to pay extra off their mortgage. This leads to other people considering the same thing and there could even be said that there was a trend in doing it. Although t could be seen as a great thing to do, there are advantages and disadvantages to doing it, like with anything.

In most cases, if you pay your mortgage back early you will save money. Compared with most savings account, mortgages are more expensive and so rather than save money, it makes sense to put the money towards paying off the mortgage. Even if you only repay a small amount it can mean that the amount of interest you have to pay over the remaining term will be lower and therefore you will save money. However, there are some circumstances where this is not the case and it is important to do some calculations before assuming that it will be cheaper for you to pay it off. Firstly, take a look at any fees that your mortgage company has for paying it off earl. Some will have no fee, some a small fee but there are some which have a significant fee for repaying it early. If you do not have a very high mortgage or you do not have very much time left before you pay it off, then a large fee could mean that it would be more expensive to repay it early. Find out what the fee is by looking at the terms and condition or speaking to your lender. Then calculate how much interest you will pay for the remaining term of the mortgage, it is best to assume that interest rates will remain the same as they are so unpredictable and compare the figures. You will be able to see whether the savings that you will make by paying back the mortgage early will be less or more than the fee that you will be charged.

This is not the only financial calculation that you should do. Consider what might happen if you invest the money that you earmarked to pay off the mortgage early. It is worth noting that an investment should be a long term investment, probably over ten years and so if you only have a short term left on your mortgage then it is best to forget this idea. However, if you do have a long term left, then you could find that if you invest the money, rather than paying it off the mortgage, you could gain a lot more money. All investments are a risk though as the item that you invest in could reduce in value. This risk is lower if you invest for a long period as this will reduce the natural fluctuations in the market. It is wise to do a lot of research about investments if you have never invested before. Many people choose to speak to a financial advisor about it as they have a lot of knowledge and can end up finding them investments which will make them significantly more return than ones that they may come across by themselves.

Some people do not like the idea of putting all of their spare money against their mortgage. They feel that they will be better off by keeping some money by for emergencies or they like to save up for things. Whether this is a good idea or not is very much a personal thing and you need to think about your own situation and opinion. Keeping spare money for a rainy day may not be wise if you have access to credit cards and an overdraft to fall back on. Obviously these are expensive but they can be a good alternative to ‘just in case’ savings to give you peace of mind, particularly if there is a very low chance that you will use them. You will gain a lot more financially in most cases if you put the money against the mortgage.

Some people feel that they no longer want a debt hanging over them. They would like to be free of it and to know that their property is their own, rather than belonging to their lender. In this case paying it off early would help someone feel much happier.