Early Repayment
Paying off your mortgage debt earlier than the lender intended is referred to as early repayment. Overpaying on your mortgage and thus paying your debt off more quickly, reduces the overall cost of your mortgage; less interest is charged because you pay interest each month on the outstanding balance.
Often, the easiest way to overpay is to take out an off-set mortgage. This is a more flexible type of mortgage that calculates interest every day. This means that any overpayment you make immediately goes towards reducing the cost of your mortgage, since interest is only charged on the outstanding balance. Although there are usually limits to how much you are allowed to overpay, a flexible off-set mortgage allows you to deposit any excess money you have into your current account and/or savings account and reduce the interest charged; here the interest is calculated based on your mortgage debt and current account credit. For more information see Off-Set Mortgage.
Terms, Conditions and Considerations
Since early repayment reduces the profit mortgage lenders make, there are often penalty fees and restrictions if you choose to repay your mortgage early. In some cases, you are advised to wait until these penalties are lifted before making overpayments and attempting to repay your mortgage early, since these fees could outweigh the financial benefit of reducing the debt.
Most lenders charge an early repayment fee if you wish to pay off your mortgage early. This fee particularly applies if you take out a fixed or discounted interest rate mortgage, since these interest rates are designed to be promotional, introductory offers.
When you opt for these rates, your lender will set a compulsory length of time that you must stay with them: otherwise, you must pay a penalty. The early repayment fee can range from a number of months' interest to a percentage of the amount borrowed that you still owe, which could cost you thousands of pounds and greatly reduce the financial benefit of paying off your mortgage early. For more information on early repayment charges see Mortgage Fees.
Some lenders set maximum and minimum limits to the overpayments you can make. For instance, you cannot overpay by more than five hundred pounds, but must overpay by more than one hundred pounds for it to be considered for the purpose of calculating interest. If your overpayment is not taken into account immediately, your lender will only reduce interest charges at the end of the year, which means that any overpayment you make does not effectively reduce
Ensure you read the your debt until later on. terms and conditions of your mortgage agreement before deciding whether or not to repay your mortgage early; in some cases, waiting until the penalty fees no longer apply could save you a considerable amount of money. In addition, mortgages are still a cheaper way of obtaining credit in comparison to many other financing options such as credit cards and personal loans. If you have credit card or personal loan debt, these will cost you much more, and so it is advisable to repay these debts first, before overpaying on your mortgage.
