I and A Mag Oct19

Is Early Repayment Right?
FOR YOUR MORTGAGE?
If you have money left over at the end of each
month, or have received an unexpected lump
sum, you may be thinking about paying off your
mortgage early. You can save large amounts in
interest and potentially cut your mortgage term
by years but, depending on your circumstances, it
might not be the best option.
So what factors do you need to consider before deciding
whether to clear your mortgage early? Here are a few questions
to get you thinking.
Does your mortgage allow for overpayments?
Not all mortgage products let you overpay and some will charge
you for doing so, but many allow borrowers to overpay up to
10% of the outstanding mortgage with no penalties. If you’re
not sure about the terms and conditions of your mortgage, get
in touch with your lender or check the original documentation.
Are you enrolled in any pension schemes?
If you’re currently paying into a pension scheme it could be
more beneficial in the long run to increase your contributions
because of the tax relief offered by the government. If not,
consider using the extra money to start saving tax-efficiently
for your retirement – the earlier you start a pension the better
your chances of a financially comfortable older age.
What are the current savings rates?
Although savings rates have been extremely low in recent
years, there may be a fixed rate or longer term savings account
that offers a higher rate of interest than that charged by your
mortgage lender. Even if it’s only fixed at a higher rate for two
or three years, as long as the interest rate after tax is higher
than your mortgage rate it would make financial sense to earn
this additional interest on your money.
Do you have significant unsecured debt?
Paying off more expensive debt such as credit card and store
card balances, and unsecured loans, is always a good idea
if you have residual income, and should be prioritised over
paying extra sums to your mortgage. Once this type of debt is
paid off you’ll automatically increase the amount of money you
have available each month and can then consider overpaying
your mortgage, which is a lower cost debt.
Do you need extra life insurance?
You probably had to take out a life insurance
policy to cover your mortgage loan, but it might
only cover death rather than illness or disability.
It’s a good idea to review your insurance needs
from time to time to ensure various possibilities
are covered. You may want to increase the
amount on a particular policy, for example, or
change from a fixed period that covers your
mortgage term to a ‘whole-of-life’ policy where
the timing of a payout isn’t restricted.
Do you have an emergency fund?
If you lost your job, could you pay the bills for at
least six months? If not, it would be worthwhile
building an emergency fund with your residual
income rather than paying down the mortgage.
An emergency fund provides a financial ‘buffer’
in the event of job loss or other unexpected life event, such as
having to reduce your hours due to long-term illness. It takes
away some of the pressure when you’re already in a stressful
situation.
These are just some of the factors that might influence your
decision to repay your mortgage early, but what are the
potential advantages and disadvantages if you decide to go
ahead?
Advantages of paying off your mortgage early
• You may be able to reduce your mortgage term by many
years depending on the amount outstanding, and enjoy greater
financial freedom in retirement.
• You’re likely to pay considerably less interest.
• You’ll enjoy greater flexibility in your monthly budget once
the mortgage is repaid.
• Property is considered a safe investment on the whole, but
even if the market became unstable you’d be protected from
financial uncertainty.
• You can achieve peace of mind and a greater feeling of
security knowing your home is paid for.
Potential disadvantages of early repayment
• Property is an ‘illiquid’ asset, which means it could take a
long time to access the cash invested in it. Unless you also
have liquid assets such as stocks and shares or cash in an
emergency fund, you may struggle financially in the event of a
personal emergency or economic downturn.
• If you’re channelling all your residual income to your mortgage
there may not be money left to save for other large purchases,
such as a car, wedding, or holiday, which could force you to
take out more expensive unsecured borrowing.
A mortgage is typically the largest debt that people take on. It
represents a huge financial commitment whatever your stage
of life and paying it off early always seems a very attractive
option at first glance.
Before you do, though, consider some of the other areas where
the money could be put to better use, at least for a while – then
you can go ahead with confidence and potentially shave years
off your mortgage term.
www.moneyadviceservice.org.uk/en/articles/should-you-payoff-your-mortgage-early
by Ann Haldon
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