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
Wednesday 17 January 2007
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.
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
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