Debt is something that people have varying relationships with. Some people see debt as one of life’s necessary evils. Others steer clear of any kind of debt as often and as much as they can.
But some things are simply always going to lead us to debt. In all likelihood, not many readers of this blog post will have paid off their student loan for example (if you have, fair play…).
A mortgage is likely the biggest form of ‘debt’ you will ever find yourself paying off. With this in mind then, the sooner you pay off any debt, the better – right? And is the mortgage market at present lending itself to paying mortgages off quicker?
Sooner rather than later?
The length of time it takes to pay off your mortgage can bring a number of different pros and cons.
Say a few years ago you sorted out a mortgage of £200,000 and are paying back £1,200 a month over a period of 20 years, with an interest rate of 3%. If you change the terms with the lender so that you pay it back over 15 years rather than 20, your monthly repayments will go up. But you will avoid having to cover that accumulating interest down the line. This means that you will ultimately save potentially into the tens of thousands of pounds overall.
This is the real boon of paying your mortgage off early. But there are obviously some limitations – the main one being affordability on the part of the buyer. Only those of us in the most stable and comfy financial position can likely consider doing this kind of move in the normal scheme of things.
The field of play at present
The mortgage industry has, like everything else, been thrown into a chaotic state by the current pandemic. It has meant that there are plenty of low interest mortgage offerings out there, and more and more high loan-to-value mortgages have been made available on the market since the new year.
A major problem for lenders is the flux into which borrowers have been placed because of the pandemic. Job stability, credit risk and future house prices are all impacting the market, while the Bank of England recently announced that the Base Rate would remain at the historic low point of 0.1%.
This means that fix-price mortgages of longer terms, such as five year deals compared to two year deals, have become more readily available with some lenders as they look to secure stable revenue from the people they lend money to to pay off their mortgage.
Can I pay my mortgage off more quickly?
For the savviest out there, potentially yes. One mortgage expert has this week advised that if you are paying off your current mortgage, you could look to remortgage on a fixed-rate payment plan over a number of years that is lower than your current repayments. You could then however pay back the same amount you have been paying, but the overpayment will cut into your balance and interest. If done correctly, this could see big chunks of mortgage debt paid off over the next few years.
This is obviously reliant on you being able to find a suitable deal and being in a financial position to do so, but has the potential to bring about big benefits.
Lump sum payments are also an option, and with interest on savings currently relatively low, the chance to put more money into paying off your mortgage could prove more beneficial.
Most lenders typically allow for up to 10% of a mortgage balance to be overpaid each year. So if you are spending more on your mortgage than you are earning interest on your savings, it makes sense to put any lump sum amount you may have into your mortgage.
What this means is your mortgage balance drops substantially, you avoid having to pay more interest over a longer term, and you ultimately become mortgage free quicker. That in itself has big monetary benefits.
Is it right for me?
But this is all about being clever with your money and putting the time and effort into finding the right deal for you. It’s about weighing up the immediate benefits or sacrifices, over those benefits in the long term.
With the market in the state it is at present however, there is a definite opportunity to look into making some financial plays that could ultimately prove very advantageous.