How YOU can pay off your mortgage early (like the very lucky Sir Keir Starmer) – our expert guide to paying off your home loan and whether it’s the best use of your cash

At the age of 62, Sir Keir Starmer is sitting pretty. Starting next month, your bank balance will be higher because you will have to pay one less monthly bill.

That’s because, 20 years after hiring him, the Prime Minister has paid off the mortgage on his £2m terraced house in north London, repaying his loan five years earlier than is standard for a British owner.

Sir Keir now joins the lucky third of the population who do not have to spend money on rent or mortgage payments, a relief for him after he indicated last July that he was feeling the pain of rising interest rates on his loan Barclays Bank mortgage. .

Most of us are not so lucky. Jinesh Vohra, who runs mortgage overpayment app Sprive, says that since the average first-time buyer is now 31 and the average mortgage length is 32 years, most of us will be paying off our mortgages “well into our teens.” sixty”.

“However, there are things you can do to become mortgage-free faster,” he says.

Paying off your mortgage early can save you thousands of pounds in interest and give your financial wellbeing a big boost. But even if you can afford it, it’s not the right answer for everyone.

“Homeowners should also consider whether these funds could be used more effectively elsewhere,” explains Pete Mugleston, mortgage expert at onlinemortgageadviser.co.uk.

If you decide to join Sir Keir and pay off your mortgage early, you’ll need to negotiate the rules set by your lender to avoid potential penalties, as well as decide whether the security of 100 percent ownership is worth negotiating for lack of financial flexibility and potentially high returns. from other sources.

The Mathematics of Overpaying a Mortgage

For most of us, our mortgage will be the largest debt we have ever had. The average mortgage taken out in the second quarter of this year was just over £185,000, while those living in expensive areas will have much larger loans.

Overpaying can shave years off your mortgage repayments and save thousands of pounds in interest by putting more money than necessary into your loan each month.

For example, on a £185,000 mortgage with a 25-year term and an interest rate of 4.93 per cent (the current UK average for a two-year fix), an overpayment of £100 a month to your lender would mean that he would pay the mortgage. canceled three years and nine months earlier. During that time, you would save almost £23,700 in interest payments.

Overpaying is becoming more and more popular. As rates rose last year, the Bank of England revealed a record £6.7bn was spent on mortgage overpayments in the first three months of 2023, while Barclays Bank said one in four of us I was paying more than necessary on a mortgage.

Vohra, whose app is designed to simplify overpayment, says the average user reduces the term of their mortgage by four years and saves £10,000 in interest. Couples save more than £15,500, a substantial sum.

But in addition to saving money over time, making overpayments can also help you get a cheaper deal when renewing your home loan.

Mortgage companies are willing to offer cheaper deals to those who own a larger percentage of their home, so paying extra to fall into a preferred group for a new mortgage can get you a better deal.

According to Moneyfactscompare, which analyzes deals available on the market, the best mortgage rate available for a three-year fixed-rate mortgage for someone with 10 percent equity in their home is 4.94 percent, while for someone who has paid 40 percent. percent of the value of your home, is 3.99 percent. With a loan of £185,000 over 25 years, the lowest rate borrower would pay £100 less per month for a loan of the same size, £975 versus £1,075.

Fine print and traps

However, paying off your mortgage may not be as easy as you think. Lenders don’t like waiving mortgage interest payments and often place restrictions on how quickly you can pay off your loan.

“Many lenders may charge early repayment fees (ERC) if you exceed a certain overpayment limit, usually 10 per cent of the outstanding balance per year,” explains Mugleston, at onlinemortgageadviser.co.uk.

These fees can be substantial, as they are often expressed as a percentage of the total mortgage loan and can be as high as five percent.

However, there are some mortgages that don’t have these fees, and you can also pay off a percentage of your mortgage without paying fees when you come to the end of one deal before moving on to another.

In addition to early repayment charges, those who make excessive mortgage payments can end up with a lack of flexibility in their finances if circumstances change, as it is usually difficult to recover the money they have overpaid on a mortgage unless they choose one with flexible features.

Wealth management expert Charles Incledon of Bowmore Wealth says paying off your mortgage early but then discovering you don’t have enough money to live on is a particular problem if you’re older and can’t remortgage to get the money out again.

He says homeowners in these situations are turning to equity release, a more expensive way to release equity from their home.

“Equity release is gaining popularity and more and more people are forced to use it,” he says. ‘But why do they have to use it? Because they paid off their mortgage, retired, and then realize that although they can live in their home without a mortgage, they don’t have enough income to live on, so they withdraw equity from their home. “It just doesn’t make any sense.”

Opting for a flexible mortgage, such as one that allows you to offset your savings against your home loan balance, can help you save money but retain the flexibility to get your cash back. However, these mortgages are usually more expensive. Barclays offers an offset mortgage at 6.22 per cent, for example, well above the average mortgage rate.

Could your money do more?

Bowmore’s Incledon says many people who choose to pay off their mortgages, like Sir Keir, could make their money work harder elsewhere and retain flexibility for their retirement.

This could include putting more money into pensions and Isas, where the money can grow tax-free and the return can be higher than if you paid off debt with a mortgage. However, this depends on your mortgage rate. If you’ve closed a deal in recent years while rates were high, you’ll likely have a harder time achieving investment returns that exceed your loan rate than when rates were lower.

Meanwhile, if you think your property is going to increase in value, by owning less of it you will get a greater return on the investment you are making, because you will still benefit from the full amount of capital growth on the mortgaged portion. of the property.

“I could be paying off my mortgage, but that doesn’t really give me more return on the property,” Incledon says.

“By saving into pensions and Isas and everything else, making use of legitimate tax shelters, you will increase your overall net worth and have much more flexibility when it comes to generating retirement income.”

He adds that the UK’s penchant for paying off mortgages is because we are a very debt-averse nation.

“People need to think about it,” he says.

“It’s all very well having a house that you have no debt on, but if you don’t have investable assets that can provide you with passive income, then you don’t have money to live on.”

Of course, for many of us, paying off your mortgage is about more than just making the most logical financial decision – paying off a mortgage can give you a feeling of freedom and save you thousands of pounds in interest.

“It depends on your personal financial goals and your risk tolerance,” Vohra says when asked if paying off a mortgage is always the right decision.

“You should seek professional advice as to which is best for your own circumstances.”