How To Pay Off Your Mortgage Early and Why
If you have decided to pay off your mortgage earlier, congratulations!
There will always be an ongoing debate about whether it makes sense to pay it off earlier or invest your money instead.
The majority of personal finance bloggers will tell you that investing your money instead is the right thing to do.
Yes, there is a lot of sense in doing this. However, my view is that the majority of people who say this think of this one-dimensionally.
The truth is, only you will know whether it is best for you to focus on paying off your mortgage early or not.
I say this because only you will know what your specific life goals are.
Most people assume that life will carry on in a straight line. You know, that they will always earn an income and stay in good health.
I’ve looked around me and life doesn’t quite work that way. Things happen and people have to change their lifestyles to survive.
The mortgage is one thing that usually remains and the banks don’t do sympathy.
So when I hear people saying “interest rates are so low, why bother with paying down your mortgage?”, I ignore them. And so should you.
Focus on doing what is best for you. For some, it will be to focus fully on investing. Yet for others, it will be to get rid of the mortgage debt or both.
And let me remind you, the principal element of your mortgage is really what matters especially in low-interest rate periods.
Many people seem to think this is some dormant debt they don’t need to focus on because it is “cheap”.
In case you wonder why I have chosen to pay off my mortgage, here are some reasons:
– I believe debt controls people’s lives. I’ve seen it hold people down for decades in jobs they hate with no way out.
It’s about winning power back. I happen to love working and enjoy what I do for a living, but who knows what tomorrow holds? It’s about having options.
– The returns (financial and non-financial) from paying off my mortgage outweigh the potential gains I could make in the 4 years or so I have left if I invested.
– Financial Independence is far more important to me and getting rid of the debt enhances this position and means zero personal debt.
– It enhances net worth naturally although this is not the primary goal.
– I am investing in index funds, ETFs and other asset classes whilst getting rid of my debt. I am not missing out.
– It took my parents reaching the age of 65 to pay off their mortgage. I want ours gone before 40 because I know how different life will be without the mortgage.
– Our mortgage paid off translates into a better quality of life for our children. It also increases our capacity to do more things we are passionate about doing.
In the same way I’ve outlined some of my reasons, you too will have yours and they will be deeply personal to you.
If you haven’t written yours down, I’d recommend you do it as it reinforces your commitment to achieving your goal.
One thing I would make clear is that you should not go anywhere near paying off your mortgage if you have a credit card or expensive debt.
I am speaking the obvious here but it is worth pointing out that those should be your initial priorities.
In addition, please don’t do this if you don’t have the cushion of an emergency fund.
As I’ve written about before, the inability to manage cash flow is the number one reason most people are broke.
Related post: How To Stop Being Broke Forever
Below are the exact things we are doing to pay off our mortgage earlier:
Remortgaging is essentially where you refinance your debt for better terms.
You have to view the debt as a commodity in the same way the banks simply see it as an asset on their balance sheet.
Your goal should be to pay over as little money to the bank as possible. Remortgaging helps us achieve lower rates and terms.
Such terms include leaving as much flexibility as possible to pay down that debt.
You do this through shopping via brokers or using mortgage comparison tools. Examples of flexibilities you want include no penalties for overpayments.
What you’ll find though is that most banks will have a 10% maximum overpayments in a year, after which you get a penalty.
Another flexibility is around the ability to remortgage and leave your current deal. In certain environments, you might want a 5 year fixed deal.
Whereas in others, you might prefer a 2-year variable deal whilst you keep an eye on the base rate.
Whenever we remortgage above to a cheaper deal, we always change our monthly payments permanently to be higher.
I’ve got to say, initially, you might be scared of doing this, but believe me, you’ll adjust fast.
Overpaying at the same time as remortgaging massively compounds your savings in terms of time.
We wiped 9 years off our mortgage by doing this. 9 years!! Think about that – 9 years of freedom!
If you want guidance on how much to increase your overpayments by, I’d suggest 5 – 10% each month.
E.g. if you currently pay £1,500 per month, then another £75 to £150 per month.
You can ofcourse do more or less depending on your circumstances.
3. Renegotiate Expenses
Every year, you’ll have expenses that need to be renegotiated. These could be gas, electric, insurance, internet etc.
For most people, these savings disappear and end up getting spent on stuff they can’t justify.
What we do is to take those savings and immediately pay it against our mortgage.
An example is our electric car. We found cheaper electricity this year and I immediately worked out the annual savings and sent the difference to our mortgage account.
I’d recommend you call your bank and get the account number for your mortgage and set it up as a regular payment option on your phone.
This way, you make it very easy for you to pay down this debt. I actually find this gets me very close to my numbers and I know my mortgage debt balance to the penny!
4. Credit Card Rewards
For years I wasted the opportunity to take advantage of this. I’d buy things via credit cards that offered me nothing at all.
Today, there are many options for making sure you’re rewarded for your expenses.
I use American Express for travel rewards and their cashback card for cashback that goes towards the mortgage.
Another way is to make purchases through Topcashback, UK's largest cashback website.
The key here is to direct any cashback amounts straight to your mortgage.
5. Pay Fortnightly
We make mortgage payments every two weeks.
Initially, this wasn’t by design as we just had other activities going on intra month.
However, doing this happens to have an important advantage.
Paying every two weeks leads to you paying your mortgage for 13 months in a year rather than 12 months.
Essentially, you are not only paying more earlier, thereby saving on interest, you’re also paying off more principal per year.
6. Use Bonuses
If you get a bonus annually, then this is a great opportunity to pay down your mortgage.
It’s nice to treat yourself to a holiday or something once in a while. However, if you’re taking this goal seriously, then you should commit at least 50% of your bonus to your debt.
Again, this assumes you have no other more urgent need for the cash. Try not to invent one or plan for one as I know is typically what we all do.
If you don’t currently get a bonus, perhaps consider negotiating a fixed amount with your employer for a clear outcome.
Another option is to do a part-time job maybe one day a month or work overtime and commit those wins to the mortgage.
7. Swap Expenses
The beauty of your current expenses is that you get to decide what exactly you spend on.
We made some important decisions two years ago. E.g. We don’t pay for cable TV. This saves a lot of money that goes against the mortgage and makes us more productive.
In addition, we drive a fully electric car. This saves about £1,500 a year minimum, which goes against the mortgage.
You’d be amazed how easily these savings here and there add up! And we’re always seeking them out.
8. Money Transfer Deals
These are similar to ‘balance transfers’ but are instead transfers from a credit card to your bank account.
You can get a good deal for about 18 to 24 months interest-free and for a small fee. I recently got offered a 1% transfer fee on £15,000.
If your interest rate on your mortgage is a lot higher e.g. 3% or more, it would make sense to use this cash transfer and prepay your overpayment.
Note that, for this to make sense, you have to be on a slightly higher interest rate. Perhaps on a fixed mortgage deal.
The key here is to be able to repay the money transfer amount before the interest-free amount runs out.
The importance of doing this is that it commits you to the mortgage overpayment. However, you must have the cash to repay the money transfer ideally monthly!
I do stress, only do this if you’re good at managing your cashflow. Perhaps via automated payments.
9. Sell Stuff You Don’t Need
Are there things in your home you don’t need or haven’t touched for 6 months?
You’d be amazed how much there is if you did a mini stock take or review.
Look around your home and make a list of things you don’t need and do the work of taking pictures and selling them.
Ebay or Gumtree are good ways to do this and you could find yourself making hundreds!
10. Automate Payments
This sounds obvious but most people only do this for their bills if at all.
Do not rely on your manual abilities to do this monthly. If you’ve decided on an overpayment amount, commit and automate it.
In addition to your commited overpayment amounts, still make adhoc payments towards your mortgage.
For example, if I am cleaning the house and find £20 kicking about, I’d send that straight to the mortgage account.
In the same way, you’ll come across random bits of money here or there or even get monetary gifts.
The key is to use these towards your goal and remember that little bits add up fast!
11. Start A Side Hustle
I see these as an opportunity to explore passion projects or use your existing skills in a different way.
There is no doubt that you have the capacity to do more and make extra money.
Most people make the excuse of not having enough time to do anything else.
I watched Laura’s TED Talk below and she really captured my thoughts on using our free time.
We have 168 hours a week. Say you sleep for 8 hours and work for 10 hours per day, that’s 62 hours left per week!
What are you doing with your spare 62 hours per week?
“Time will choose to accommodate what we put into it”. “We build the lives we want then time saves itself” – Laura Vanderkam.
Everything you do is your choice because you’re making it a priority. If you make starting a side hustle a priority to become debt free, you’ll find the time.
Enjoy her TED Talk:
- READER CASE STUDY: Pay Off Debts Fast or Invest?
- 10 Tried and Tested Tips To Help You Become Debt Free
- 7 Essential Habits For A Successful Debt Free Journey
Is Paying Off Your Mortgage Early A Priority for you? If so, Why? If not, Why not?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.