There are many people these days that are thinking of paying off their mortgage early. However, is it the right choice for everyone?
The first thing to find out is whether you are allowed to pay the mortgage off early. Most mortgages will allow this, but for some you may have a fixed interest rate period where you are committed to a contract and not able to make overpayments. With some mortgages you will have an early redemption fee. This is a charge for paying it back early and it could be quite high and so it is worth finding out how much it is. If the charge seems very high, then calculate how much money you will save in interest by paying the mortgage off early and this should allow you to be able to work out whether it is worth paying it off early or not. With interest rates low at the moment the amount you pay in interest may not be that much and so if you have a small term left you may find it is better to wait and not pay it off early. However, if you have a long term left and a small fee it will be worth paying it off early. It is definitely worth working it out though. Knowing how much you could save, will help you to feel motivated to pay it off.
Deciding to payback the mortgage is one thing, but how you go about it is another. You will need to make sure that you have the funds available to do so of course. You may have savings that you can use or you may be just deciding whether it is worth making overpayments to pay it off earlier, but still in the future. Either way consider whether this is a good idea. Think about where the money is coming from and what you would have otherwise have been doing with it. If you have it in a savings account, think about what you will fall back on should you then need some extra money. If you will be making monthly payments, think about how you will afford those payments and whether you will need to go without things in order to do so.
If you are clearing the mortgage completely then it will be a big relief to be free of that burden and it can be a fantastic feeling. However, if it leaves you will no money at all to fall back on then it could mean that you will have to start borrowing again. This is not ideal, but it depends on the chances of this happening and perhaps how confident you are in your ability to build up some savings again. It is sometimes recommended that we have six months’ worth of money saved (what we normally spend not what we earn) but if you have an expensive debt, it is certainly worth considering whether it is better to pay it off.
Some people worry that if they pay off their mortgage it will be harder to borrow in the future. They feel that having a mortgage and showing that they can make the repayments shows that they are trusted. They may have a flexible mortgage where they can overpay and then draw that money back and so they almost are able to lend to themselves and may miss being able to do that. However, this may not be the case at all. Your credit record is not just based on your ability to pay off your current loans Having lots of debt will go against you and if you are paying bills on time that will show that you are responsible with regards to paying for things. Having the ability to draw money is a tricky one to argue against. It is a great facility and it could be cheaper than other forms of borrowing as long as you do not take too much for too long, as the low interest rate is a positive but if you borrow the money for a long time those interest payments will add up. You may find that you are spending more money because you have this option of borrowing and it might be wise to stop anyway.