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How to Repay Your Mortgage Early

Given that a mortgage is usually a long-term commitment, sometimes a significant one, paying it off can be a major financial (and personal) milestone. For some people it may even be worth considering taking steps to repay a mortgage early.

The practicalities of overpaying a mortgage

There are essentially two parts to a mortgage. The first part is the capital – the money borrowers need when they are buying a home. The second part is the interest charged on the loan. Both the capital and the interest need to be repaid but this can be done in different ways.

With repayment mortgages, repayments are intended to pay off both the interest and the capital borrowed. In principle making overpayments reduces the amount of capital borrowed and this should reduce the amount of interest payable. How this works in practice will depend on the lender.

With interest-only mortgages, the repayments are only to cover the interest. Borrowers would need to check with their lender if there was a possibility of making overpayments to reduce the sum owed. If not then the borrower needs to make provision to repay the capital at the end of the mortgage term.

With offset mortgages, the mortgage works like a massive overdraft. As long as borrowers have reduced the outstanding balance to zero by the end of the term, they are largely free to manage their overdraft as they see fit. There is no repayment schedule as such but borrowers can manage their family finance to reduce the balance to zero as quickly as possible if they wish.

There can be a cost to repaying early

Put quite simply, the interest charged on a mortgage is the lender’s gain. Making overpayments to reduce the amount of interest payable on a mortgage means that a lender makes less gain on it. Because of this, some lenders may charge fees to repay a mortgage early. On the other hand, it also reduces a lender’s risk and therefore some lenders may be sympathetic towards the idea. With this in mind, it can be wise to check the small print on your mortgage or to contact your lender directly to see what their policy is.

Is repaying early the right decision?

Before making any significant overpayments to a mortgage, it can be a very good idea to get some professional financial advice from a qualified financial adviser who can look at your overall financial situation and your personal and financial goals and help you to take the right decisions for your own, specific, circumstances.


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