Mortgage Clinic: 'How can I pay off my home loan early?'
Wednesday 11 July 2007
Q. 'I want to pay off my mortgage early, but I'm not sure how to do it. Flexible mortgages are tempting, but they don't seem to offer the best rates. Can I just overpay on a normal mortgage as and when I have the money?' NH, Leeds
A. There is nothing to stop you taking out an interest-only mortgage and making overpayments when you can.
This could be because your income is irregular, or because you prefer to make payments into an ISA, pension or even endowment with a view to using the proceeds to pay off the capital at the end of the mortgage term.
But relying on voluntary overpayments will only work if you have both the discipline to keep them up and a mortgage that allows them. Most lenders allow repayments of up to 10 per cent of the outstanding capital each year, but not all do. Nationwide, for example, restricts overpayments to £500 a month.
Bear in mind, too, that overpayment limits are usually the same whether you have an interest-only or a repayment mortgage. The exceptions include standard variable rate mortgages as well as some "flexible" and tracker loans. These may well allow more scope for overpayments, but you need to make sure you are not paying over the odds for such flexibility in the first place.
According to Katie Tucker, from brokers John Charcol, the process for making overpayments is the same, whether your mortgage is interest-only or repayment.
You can either ask to reduce your mortgage term or you can make voluntary overpayments. "Overpaying a £100,000 mortgage by £100 a month will reduce the term of a mortgage from 20 to 15.5 years," she says.
There could be some cases where it makes sense not to repay capital but to save the money. However, this will only be the case if you can earn more on your savings than you are paying on mortgage interest. Keep in mind that once you have used your Isa allowance, you need to factor in the impact of tax on savings interest.
A more practical option could be to opt for an offset mortgage, suggests Tucker. The interest rates on the best offset mortgages now rival those on ordinary home loans, and if you are happy to have your savings, mortgage and possibly current account with the same company, the process is very convenient. Any money that comes in to your savings or current account immediately reduces the interest bill on your borrowing, cutting your mortgage term accordingly.
Confused about your mortgage options? Foxed by jargon? Email firstname.lastname@example.org. Note: We will not reveal your identity, and we cannot give specific advice
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