Is it Worth Paying off the Mortgage Early?

Mortgages & Money

As people get closer to the status of being mortgage free, they wonder if they should go for it by paying off the mortgage early. After all, who wouldn’t like to see those monthly mortgage payments in the rear-view mirror and have some extra cash lying around? It’s an alluring thought, indeed. However, before jumping right in, stop to consider if it’s the right thing to do and take a closer look at the pros and cons.

These considerations don’t just apply to owner occupiers, but also to buy-to-let landlords. Whether paying off your mortgage early makes financial sense or not, will likely depend on several factors, not least of which is your personal circumstances.

Giving careful thought to this issue and weighing everything up by asking pertinent questions, should help you decide if it’s the right thing for you in your circumstances.

Interest rates

Interest rate performance and projections should be an important factor in any consideration of whether to pay off your mortgage early, or not. This consideration is particularly important for those investing in the buy-to-let property market because of the strong and advantageous fixed mortgage rates available.

Interest rate rises enacted by the Bank of England have only happened twice in the last decade. Money freed up by paying off your mortgage early could potentially be used to reinvest, making your money work for you rather than being tied up.

Inflation

Inflation is something that can be worrisome to anyone. All of that hard-earned money is sitting in a bank earning next to nothing while its purchasing power is dwindling by the day. However, if you are smart about it, you can use inflation to your advantage in deciding whether to pay off your mortgage early.

A buy-to-let property can receive rental income to cover the mortgage costs, but by the time you come to make the final capital repayment at the end of the mortgage term – usually about 25 years – not only will the house have increased in value with capital appreciation, but the end payment will also be relatively much less compared to when you purchased it. Put bluntly, £300k now won’t be worth the same in 20 years from now.

Mortgage conditions

A good place to start when deciding if paying off your mortgage early is worth it, is to first check with your lender if you are permitted to. Where there is no agreement in place at the start of your mortgage, there will likely be a financial penalty for doing so. It’s usually the case that only 10% of the loan can be repaid within a fixed time. Having said this, it may also be the case that there are no restrictions applicable to your mortgage, and this is even more likely where you have had the mortgage for a substantial time. The only way you will know for sure is to speak with your ender.

Re-investing elsewhere

When the cost of financing is low, taking advantage of the capital tied up in your property and re-investing it in an investment opportunity that offers a greater ROI may be the way to go. For buy-to-let investors, the cost of borrowing is a salient factor in deciding whether to invest at a given time as they seek to maximise profits.

Retirement

As we get older, we inevitably seek more stability and reassurance in our financial position with fewer liabilities. The closer we are to retirement, the more it makes sense to pay off the mortgage, as we lose our wage-earning capacity, something that will have to be factored into your decision. In contrast, the younger a person invests in real estate, the higher the returns can be compared to paying off debts.

Liquidity

Money that is used to pay your mortgage can restrict the available cash flow for other purposes, so a lot will come down to your personal circumstances and risk tolerance. Having enough liquid reserves for things like unexpected illness, job loss, or other family emergencies is critical. Life throws up all sorts of unexpected things, and if paying off your mortgage means you have lost your financial safety net, it may not be such a good idea to pay off your mortgage early.

For some, finding a happy medium is a move in the right direction. By paying what you consider to be the maximum allowable repayment, you can also reinvest for the future. With at least some of the mortgage being paid off in advance, you can take a payment holiday at a later date, if the need so arises.

Conclusion

Paying off your mortgage might be the right thing to do; it may also be the case that it doesn’t make any financial sense. Therefore, careful consideration should be given to your personal circumstances along with external factors such as interest rates. And of course, circumstances change. Paying off your mortgage may not seem like the prudent thing to do now, but in a year or two, that could change.