How to pay off your mortgage early

We all know the drill - you get a mortgage, then pay interest for 25 years. But does it have to be that way? Rob Griffin explores other ideas


1 SELL SHARES IN YOUR HOUSE

The plan: Who needs a mortgage anyway? Why not invite friends to become shareholders in your house and use their cash to pay off the building society? This means you will have a number of years living mortgage-free in the house, before selling it for a decent profit.

How the figures work: Your house is worth £400,000 and you still have £200,000 left to pay on the mortgage. You have a 25-year repayment mortgage at 6 per cent, paying £15,463 a year. Instead, you sell 50 per cent of your property to 10 friends, each of them giving you £20,000 for a 5 per cent stake in the house. You then use the money to pay off your lender. The property then rises in value by 30 per cent over the next four years to £520,000 at which point it is sold. Your friends will have made £6,000 each, while your stake would be worth an extra £60,000.

Pros: It clears the debt straight away and means you won't be paying hefty interest charges for the next 20 years. If the property market rises sharply, it could provide everyone with a handsome profit.

Cons: There will need to be legal agreements drawn up between all partners so everyone knows when and how they are likely to receive the return on their investment. Also, you lose control to some degree - your friends may not be happy with you making alterations, for instance. Also, the profits received by your friends will be subject to the usual capital gains tax rules.

2 USE AN OFFSET MORTGAGE

The plan: Reading the small print of your mortgage - and getting your head around the different types available - can help you to pay off your mortgage quicker. Many standard mortgages allow you to make overpayments when you're flush, thereby either reducing your monthly payments or paying off the balance ahead of schedule. But offset mortgages go further - the interest you pay decreases the more you have in your bank account.

How the figures work: If you have an offset mortgage of, for example, £150,000 and savings of £30,000, you will only be charged interest on £120,000.

Pros: Suits anyone who wants to reduce their mortgage without sacrificing the safety net of savings.

Cons: Your repayments will increase if you start spending money you have saved. And interest rates charged on such products are rarely the lowest on the market.

3 BUILD A PORTFOLIO OF PROPERTIES

The plan: You borrow extra money against your current home, keeping the costs down by switching to an interest-only mortgage. This means you're no longer paying off your debt with your monthly payments, but the extra cash allows you to purchase flats that you rent out. The rent must cover the repayments, and assuming house prices rise, you repeat the process until you have a portfolio which goes up in value until you sell the buy-to-lets and pay off all the mortgages including your initial mortgage.

How the figures work: Say your home is worth £400,000 and you pay £1,300 each month on a repayment mortgage of £200,000 over 25 years, at an interest rate of 6 per cent. By switching to an interest-only mortgage at the same rate, you could borrow an extra £60,000 for the same monthly cost, and you use that cash as a deposit on two buy-to-let flats, each worth £150,000. Monthly repayments on a 6 per cent interest-only mortgage of £120,000 would be £600, according to Ray Boulger of mortgage advice company John Charcol, while the average rental income would be about £625. If property prices rise at, say, 5 per cent a year, the flats will be worth a total of £513,000 in 11 years' time. So you sell them and pay off all the mortgages - 14 years ahead of schedule.

Pros: The website Propertyforecasts.co.uk predicts average UK prices will rise by at least six per cent in 2007. Bumper profits can be made when property prices are rising fast.

Cons: A property crash, or a sharp hike in interest rates, could land you in serious trouble. And there is always a risk of not finding a tenant, or the tenant from hell. In addition, you will also have costs such as arrangement fees and solicitors' bills, and an accountant to help you minimise your capital gains tax payments when you sell up.

4 SELL YOUR GARDEN

The plan: If you are lucky enough to have plenty of land, why not sell it to your neighbours or a developer? You can then use the proceeds to either substantially reduce your debt burden - or pay it off completely.

How the figures work: If you are in a sought-after location and have already got planning consent in place, you could be on to a winner. For example, a plot measuring 50ft by 120ft with outline planning permission for a four-bedroom house recently went on the market in Hebden Bridge, Yorkshire, for £170,000.

Pros: It's a good source of capital and a fast-track way of paying off your outstanding debts. There are also likely to be plenty of potential buyers, particularly in the South-east where space is at a premium.

Cons: The value of your property will decrease, and you'll want to make sure you don't end up backing on to a huge housing estate, rather than that lovely patch of rolling countryside. You will also need to get tax advice as this could potentially trigger a capital gains tax charge.

5 RENT OUT YOUR GUEST BEDROOM

The plan: How often do friends actually come to stay? If you took a lodger you could take advantage of the Inland Revenue's Rent a Room scheme that lets you earn up to £4,250 a year tax-free. You use this money to make overpayments on your mortgage.

How the figures work: Assuming you are using The One Account mortgage on an interest rate of 6.2 per cent and have £50,000 left to pay on your mortgage over the next 10 years, you would be able to clear the debt four years and three months quicker by paying the £4,250-a-year income into the mortgage account.

Pros: It's a decent source of extra income and can certainly help shrink the mortgage, especially if you haven't got much left to pay. If you are in a student town, there are likely to be plenty of people wanting to rent.

Cons: If you've still got a large mortgage, £4,000 a year won't go very far, unless you want a lodger to feature in your life for the next decade. The scheme doesn't allow you to claim any expenses, such as heating.

6 USE YOUR SAVINGS

The plan: Instead of putting your spare money into savings accounts, use it to help pay off your mortgage instead - and save a small fortune. In the vast majority of cases, the cost of repaying debts far exceeds the returns generated from saving.

How the figures work: If you have a £200,000 capital and interest mortgage on a rate of 6 per cent, you're paying out £15,463 a year. However, if you used your £20,000 savings to make a capital repayment off your mortgage, you would then only be paying £13,917-a-year - a saving of £1,546.

In contrast, if you had invested that £20,000 in a market-leading Instant Access Account with Cahoot at 5 per cent gross you would have received £800 as a basic-rate taxpayer and just £600 if you are a higher-rate taxpayer.

Pros: This could substantially reduce the interest you pay, freeing up your money to pay off the balance of the mortgage.

Cons: You won't have the comfort of having savings behind you and it might not be so easy to get the money back. You could be in financial trouble if you lose your job or fall ill. You need to make sure your lender won't hit you with a sky-high early repayment fee.

7 INVITE GRANNY TO STAY

The plan: Invite granny - or a close relative - to live with you and use the money they make from selling their own properties to pay off your outstanding mortgage.

How the figures work: You live in a £600,000 house on which you still have £250,000 left to pay. Granny, however, doesn't owe a penny on her property, which is sold for £400,000, and agrees to clear your outstanding mortgage debt, while retaining the remaining £150,000 as part of her savings.

Pros: You will save £19,329 a year, if you were paying 6 per cent on a 25-year repayment mortgage, and even if you share this bounty with your granny, you'll still be well in pocket.

Cons: You will need to seek advice from a tax consultant as there is a possibility that this scenario could trigger a charge under the pre-owned assets rule introduced to stop people dodging inheritance tax.

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Editor-in-chief - Financial Services - City, London

    £60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Guru Careers: Management Accountant

    £27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

    Guru Careers: Project Manager / Business Analyst

    £40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

    Day In a Page

    General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

    'We will not sit down with Nicola Sturgeon'

    In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
    VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

    How ordinary Britons celebrated VE Day

    Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
    They came in with William Caxton's printing press, but typefaces still matter in the digital age

    Typefaces still matter in the digital age

    A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
    Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

    'Missing link' between Earth's two life-forms found

    New microbial species tells us something about our dark past, say scientists
    The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

    Pan Am Experience: A 'flight' back to the 70s

    Tim Walker checks in and checks out a four-hour journey with a difference
    Humans aren't alone in indulging in politics - it's everywhere in the animal world

    Humans aren't alone in indulging in politics

    Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
    Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

    Ronald McDonald the muse

    A new wave of artists is taking inspiration from the fast food chain
    13 best picnic blankets

    13 best picnic blankets

    Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
    General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

    Miliband's unlikely journey from hapless geek to heart-throb

    He was meant to be Labour's biggest handicap - but has become almost an asset
    General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

    On the margins

    From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
    Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

    'This is the battle of young Egypt for the future of our country'

    Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
    Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

    Why patients must rely less on doctors

    Improving our own health is the 'blockbuster drug of the century'
    Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

    Flesh in Venice

    Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
    11 best anti-ageing day creams

    11 best anti-ageing day creams

    Slow down the ageing process with one of these high-performance, hardworking anti-agers
    Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

    Juventus vs Real Madrid

    Five things we learnt from the Italian's Champions League first leg win over the Spanish giants