Can Mortgages Be Paid Off Early? An Important Home Loan Query

Newspapers and websites occasionally run stories about homeowners who have managed to pay off their mortgages early. This is something most people with a home loan have probably thought about doing. For some, it may remain a dream. For others, it may well be possible to work towards clearing their loan far earlier than the term would suggest. In this article, we will explore the options and considerations to bear in mind if you are thinking about paying off the biggest loan you will ever have. Remember, it is always recommended to get professional advice prior to making a financial decision such as this.  Every loan is based over a term. This is often 25 years, but it could be a longer or shorter time than this. If you make the required monthly repayments on time each month, you will clear the loan on the date given by your lender. However, if you pay more than the minimum required, you will clear it sooner. The first thing to remember is that not all lenders allow you to overpay your mortgage without incurring penalties. Your annual statement should give you a repayment figure to clear the loan. It should also indicate whether you can overpay the minimum amount you are required to pay each month. Any charges that might apply should also be given. If you cannot find the correct information, get in touch with your lender to find out where you stand. You should also make sure any additional or larger payments you make will reduce your loan amount, instead of being used to reduce your monthly payments. For instance, overpaying by £5,000 should reduce your total amount owing by the same amount. It should not be used to bring down your remaining monthly payments from that point on. The latter example would merely give you less to pay each month. The end of your loan term would remain the same.  Perhaps you haven’t yet got a loan, but you are considering purchasing a property with the help of one. There are lots of elements to think about when you are shopping around for the right loan to help you buy the property of your dreams. While few people think about paying off that loan early at this stage, it’s the best time to bear this in mind. Even if you don’t have any firm plans to clear the loan as quickly as possible, it makes sense to know you can if you wish to do so. When shopping around for mortgages, look for ones that do allow you to make overpayments whenever you wish. This could mean one of two things: The first example may not seem worth doing, but you’d be surprised how much faster you can pay off your home advance by overpaying by even a small amount each month. The second example opens the way to make additional payments whenever you have some extra cash to put towards your loan. Find out about any potential penalties attached to making overpayments prior to accepting a loan. It may not seem the most important element to consider now, but you may be glad you did focus on this point later. Many lenders allow overpayments up to a pre-set limit each year. If you don’t go over that limit, you can overpay without charge. The bottom line is to make sure you have all the facts and figures at your disposal prior to making a decision.  Many people make their required payments and clear their loan at the end of the stated term. There is nothing wrong with doing that, of course. However, if you pay it off early, you’ll own your home free and clear far sooner. You will also pay far less in interest. Even rounding up the usual monthly payment by £50 or so can make a pronounced difference. Let’s say your mortgage stands at £150,000 and is set to last another 25 years. If you are paying 3% interest on it, you’ll eventually part with over £63k in interest. That extra £50 a month may not seem like much, but if you can afford to do it (and you’re not charged for doing so), it has a surprising effect. Not only will you clear your mortgage over two years earlier, you’ll also save around £7,000. It’s surprising how quickly the interest stacks up – and how much you can save even by making a small change to your payments. Of course, you should consider other elements alongside your loan before you decide what to do. Do you have any other debts, for example? If you have an existing balance on a credit card or store card, this should be your priority. If you can switch an outstanding balance to a 0% deal and create a plan to clear it before the deal runs out, that’s great. If not, work on clearing that debt before you consider overpaying on your home advance. Interest rates are still very low at present. That means you are almost certainly paying an interest rate on your credit or store card debts that is far higher than the rate in place on your mortgage. The rule of thumb is always to clear the most expensive debt first. So, before you do anything, go through your finances and see where you stand. This will allow you to make the most positive decisions regarding your situation.   It may seem almost impossible to imagine the day when you finally complete your mortgage commitments and clear the loan. Once your loan is paid up and you have cleared everything you owe, you will finally be free of the mortgage and your home will be yours. If ever there was a time to celebrate, this is it! The Land Registry will possess the title deeds for most properties throughout England and Wales. On some occasions, your lender might have the deeds. If this is the case, you should receive them once the mortgage has been cleared. If not, you can contact the Land Registry to request them and to confirm the mortgage is completed. They will always be held electronically by the Land Registry though, so you know you can get in touch with them if need be. You won’t have the only copy of the deeds. If you get a paper copy of your deeds, be sure to keep them in a safe or other secure place. There could be facts or details on them that may not be in the electronic copy.  This is a good time to consider your financial situation. Paying off the loan you secured to help you buy your property is a big moment in your life. Chances are you have paid hundreds of pounds to your lender every month for the past 25 years or so. Clearing that debt is a big step and one to celebrate. It also means you will free up a considerable amount of cash each month. If you have been paying, say, £750 per month towards your mortgage, you will suddenly find you have far more disposable cash than you had previously. This could make a pronounced difference to your financial situation. You may choose to save that cash rather than immediately dipping into it. It could help fund your retirement. Taking independent financial advice at this stage can be prudent. You can see too that paying off your loan early will free up that extra cash far sooner. You’ll likely make significant interest savings too – another plus point in your favour. Many people focus on how to pay off the debt and don’t think about what they’ll do with the extra cash. No two people will be in the same situation, so it’s a good idea to consider where you stand and what you could do with the extra money. There are many possibilities here: What would you do? Consider all the options available to you and make the best and most logical decision given all the facts.  Few people would be able to afford to buy a property without the assistance and cash offered by a bank or building society. The basic premise is this, the lender provides the necessary cash to buy the chosen property. That technically makes them the owner. However, if the borrower keeps their side of the bargain and makes the required monthly payments on time, the lender won’t take ownership of the property. If the borrower defaults on their payments, however, the lender will seek to repossess the property to get their money back. Hence why you should always approach your lender the moment you begin to experience issues paying back your loan. Once you have met your obligations and clear
ed the loan, however, your property will be yours. If you decide to move, you will receive all the money released from the sale. Your lender will no longer have any financial attachment to it. As a cash buyer, you’ll likely find it easier to move elsewhere too. As you can see, there are significant advantages to be had if you can clear this debt earlier than the term suggests.

Published on 15 October 2018

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