How to clear your mortgage early (and whether you even should)

Whether you're just about to get a mortgage or you've been paying it off for years, imagine life without the biggest monthly bill that most of us will face. You could spend more on travel or hobbies, or even work fewer hours each week.

And with interest rates so low and the economy so uncertain, ploughing money into reducing your biggest debt rather than leaving cash to stagnate in a savings account may seem like the best thing to do.

But is it? Will clearing your mortgage early put a strain on your other finances or give you financial freedom? Here’s a brief guide to the whys, the why-nots and the how-the-heck-would-I-do-that-anyways…

It’s very straightforward; the more of your mortgage you pay off, the less interest you will pay over the lifetime of the loan. Because mortgages last so long, even a low interest rate can add up to a considerable amount on top of what you originally borrowed.

Interest rates are very low just now. That means you don’t pay a huge rate on most mortgages but it also means that you are not likely to earn much on your savings. In fact, by clearing chunks of mortgage where you can, you’re very likely to save more in interest than you’d earn in a savings account.

Having said that, it’s also really important to be careful or you risk being hit with penalty fees. Most lenders allow you to overpay by up to 10% a year but after that, they may charge a penalty fee. The amount you can overpay for free varies from lender to lender, so do check what your terms are so you don’t get hit by unforeseen costs.

Plus, just imagine the freedom of being mortgage free – avoiding one of the biggest bills most of us have to pay for the rest of your life.

Perhaps you’re reading this and thinking that overpaying the mortgage is an impossible dream. So we spoke to Sarah and Tom, a couple in their early 30s who live in London with their young baby. Their goal is to clear their 30-year mortgage in half the time.

So how are they doing it?

“We borrowed £204,000,” explains Sarah, “and we saw that if we just made the repayments we had to then we’d pay back well over £300,000. That is just so much extra, it was going to be half the amount we’d borrowed just in interest.”

In their first year, they spent their savings on furniture, decorating, a wedding and epic honeymoon. Year two of homeownership and they stepped up focus on their mortgage: “We paid off as much extra as we could – an extra £1,000 a month and we did that for 15 months,” Sarah says.

Now they have a baby and she is on maternity leave that’s not as achievable but they still aim to overpay by at least £250 a month.

So how? Trust fund? Private wealth? No, they just work really, really hard at it. “Every month, we think about it, every month,” Sarah says. “We’re just both really careful with money; so rather than get a monthly train ticket Tom will cycle three days a week. We always take leftovers in for lunch, we shop at Aldi. People say ‘don’t buy a coffee every day and save £2.50’, well, we’ve never [bought that daily coffee] ever.”

And they check their mortgage account every month so that it remains a constant focus, helping them really rein in their daily spending choices. That rigid control over their small-scale spending allows them the budget for overpayments on their mortgage.

Despite their overpayments they still have a good holiday each year. The couple say they just control all their daily spending with care and meticulous budgets, and keep their mortgage as a constant priority. “We very much think of our mortgage as a debt to pay off, not as something inevitable,” concludes Sarah.

It’s very easy to simply not consider paying more than the minimum on your mortgage. But by checking your budget, getting in control of your finances and prioritising overpayments, it’s possible to dramatically cut the time you spend paying interest.

Clearing your mortgage early isn’t the right decision for everyone. If you have other, more expensive debt such as credit cards or unsecured loans then paying those off needs to be the priority – because mortgage interest rates are comparatively cheap.

Also, if overpaying means incurring a penalty charge then you may decide it is best to keep the money in a savings account instead, at least until you next remortgage.

And it’s important to have savings in place for an emergency. It’s quite hard to get money back out of your house – it can involve re-mortgaging – so overpayments will not be much help in an emergency.

If you’ve not yet managed to save into a pension scheme then you may well want to ensure your old-age is being provided for before you start paying down your mortgage debt.

With a pension you benefit from contributions from your employer and tax breaks from the state, so it’s a very efficient way to save, and the earlier you start, the greater the rewards.

Having said that, you don’t have to aim to completely clear your mortgage in order to enjoy a lot of the benefits of paying extra off it.

Anna, who is 35 and married with 2 children, used the Moneysavingexpert Mortgage Overpayment calculator and realised that small but regular overpayments would make a big difference.

“I'm a good few years away from achieving mortgage free but I've just re-mortgaged and I'm going to keep paying the £200 difference to try and pay off at least five years early. I'm doing it to pay less interest and to have some more financial freedom.

As Anna says, “Even five years makes a massive difference to the amount of interest you pay.”

So why not take some time to do the maths and see how much you could save. It might motivate you to cut back elsewhere, overpay when you can and get mortgage free far sooner.