Updated 04 February 2021
Living mortgage free doesn’t have to be a pipedream. With forward-thinking and a plan in place, you can pay off your mortgage and no longer face the burden of monthly repayments. Mortgage terms are typically 25 years, so if you took one out aged 25, you’d be 50 by the time you pay it off – and that’s if you haven’t extended the term. Are you ready to bring down the repayment years to live mortgage-free? Here’s how it’s done.
Having more disposable income, and no interest to pay, are just some of the great benefits to being mortgage free. When you pay off your mortgage, you’ll have much more money to put into savings, spend on yourself and access when you need it. On top of this, you’ll have the peace of mind that comes from knowing that your home is absolutely yours – to keep, sell or bequeath to your family as you wish, with no more debt to service.
That’s not all. Mortgages cost an extortionate amount. Pay it off early and you could save yourself tens of thousands of pounds in potential interest. What’s more, the amount you’ll save on interest is likely to outweigh the small interest returns you’d currently get on savings. Many financial commentators suggest – with a few caveats – that paying off a mortgage is a better long-term use of excess income than putting it into savings.
The path to living mortgage free has a few pitfalls to watch out for. You’ll need to be wary of early repayment fees, and it may be wise to pay off other, more expensive debt first. Thirdly, you should make sure you have enough other savings (or similar ‘liquid’ assets) to fund your spending in the meantime, or help you in emergencies – as money ploughed into your property isn’t accessible until you sell it.
If you still want to try and become mortgage free, here’s how to go about it cost effectively.
Simply upping your mortgage payments will help you pay your mortgage off faster, but perhaps not as quickly as you’d like. Lots of us don’t even know the age we’re expected to make our last mortgage payment on our current term. Find out how long you’ve got left on your mortgage and think about when you’d like to pay it off by. You can then look at your monthly outgoings to budget how much extra you can afford to pay.
You can overpay on your mortgage either by increasing your monthly payments or by paying off a lump sum. However, there can be additional fees involved to deter you from paying off too quickly.
Most lenders will let you overpay by up to 10% each year before you incur fees, so check your mortgage terms and do your calculations to avoid overstepping the upper limit.
Although the fees may seem harsh, the 10% allowance is reasonably generous. If you have a £100,000 mortgage, you could pay off a lump sum of £10,000 in a year without getting penalised.
Do be aware that some mortgage providers will look to reduce your monthly repayment amount if you start regularly overpaying. It can happen automatically and be quite a shock, so speak to your provider and make sure your payment stays fixed (otherwise your overpayment efforts will be cancelled out by the monthly reduction).
Some lenders will be willing to offer you a shorter mortgage term, so when you come to re-mortgage, find out if this is possible.
Your monthly payments will be higher, though. Let’s use the £100,000 mortgage example again. If you have the loan for 25 years and pay 2% interest, your monthly repayments will be £423.85. But if you shorten the term to 20 years, your monthly repayments will be £505.88. That means you’d need to factor in paying an additional £82.03 a month. This may seem doable, but the difference can be much higher for lots of mortgages, especially if you want to reduce the term significantly.
Also bear in mind that you’ll be stuck with your new term. If you want more freedom and a safety net, overpaying might suit you better as you can stop whenever you want.
By re-mortgaging regularly and shopping around for the best deal, you can make sure you’re on the lowest rate. The lower the rate, the easier it is to clear your debt quickly.
In our example of a 25-year £100,000 mortgage with a 2% interest rate, this deal will cost you £27,156 in interest over the term. But with a standard variable rate (SVR) of 5% the £100,000 mortgage would be costing you a whopping £75,377. But if you can find a 1.5% rate, you could shrink your interest to £19,981, saving you £55,396 compared to the 5% SVR.
Getting a low interest rate isn’t always as simple as shopping around for the best deal. A low loan-to-value ratio (LTV) helps you access them. Your LTV is the amount you’re borrowing compared to the value of your property.
You can lower your LTV in a few ways:
If you’ve already taken out your mortgage, your best chance of lowering your LTV is to overpay. Most lenders have LTV thresholds that determine the deals. When you’re close to the threshold, see if you can overpay to dip below it before you re-mortgage. Generally the very best deals start to become available once your LTV drops below the 60% mark.
By choosing an offset mortgage, you can use your savings to ‘offset’ (i.e. reduce) the amount of debt you pay interest on. With this kind of mortgage, you’ll need to take out a mortgage and a savings account with the same lender.
Here’s how it works. Say you have a £100,000 mortgage and £50,000 in the savings account. You only pay interest on the difference, in this case just £50,000 is chargeable. The money you save in interest can be used to pay off your mortgage quicker. Another bonus is that you’ll have access to your savings if you need them, which can be reassuring.
The downside is that interest rates can be higher, so you’ll need to make sure your offsetting amount is high enough to save you money.
Although not for everyone, getting a lodger can bring in an additional revenue stream that makes overpaying much more feasible. Through the government’s Rent a Room scheme, you can earn up to £7,500 a year tax-free from renting a furnished room to a lodger – that’s a decent amount of money to overpay your mortgage by each year.
If you’re not keen to have someone living with you full time, you could go down the Airbnb route to offer space in your property as a holiday let. This option does take more work, as you’ll need to manage the listing and ensure the room is clean for new guests, but it can prove profitable. You’ll still be eligible for the Rent a Room scheme as it’s available for people running bed and breakfasts or guest houses.
This is really step 1 – you’ll usually want to eliminate other debts before you even think about paying off your mortgage. Credit cards and short-term loans usually carry higher interest rates than mortgages, so it makes sense to clear those debts first to avoid the interest building up. Once you pay off those debts, you’ll have more money to overpay on your mortgage.
Of course, this option isn’t always black and white. For instance, you might have a credit card that doesn’t earn interest. Or you may have student debt that’s racking up high interest, and you could feasibly pay it off before it’s automatically wiped after 30 years, which might be more cost-effective than clearing your mortgage debt.
If you want to live mortgage free, something usually has to give. This may mean thinking about what you could live without.
The average Brit goes on 1.9 holidays abroad a year and 3.9 holidays in total (lockdowns notwithstanding). Simply skipping one of those holidays could save you hundreds, if not thousands, of pounds that you could put towards overpaying your mortgage. Holidays aren’t the only luxury you could consider cutting. If you have more than one car, could you manage with one? Or even none? Could you skip on going out? (After all, you’ve had practice.) Couples could make a pact to skip on mutual birthday and Christmas presents, saving potentially hundreds every year. The list goes on – it’s about what you’re willing to sacrifice in return for paying off your mortgage.
Having no mortgage to pay sounds like bliss. If you’ve tightened your belt to achieve this, then by now you’ll probably want to treat yourself. But there are plenty of other things you could spend the extra money on too, such as additional pension contributions, investments, or helping your children onto the property ladder.
Talk to a financial adviser about the best ways to become mortgage free, and what to do afterwards.
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