How to pay your mortgage off early

Mortgage debt is something most home-owners dream about escaping from. While the mortgage keeps a roof over our heads, it's also a millstone. However, paying off your mortgage early isn't as hard as you might think. An inheritance or a lottery win is ideal but, in the meantime until that happens, there are a number of things you can do.

Mortgages paid at the standard variable rate aren't going to disappear as quickly as a cheap fixed or discount interest rate loan. Around 30% of us are paying our mortgage at an average standard variable rate of 5.68%, even though you can get much cheaper short-term fixed rate mortgages more than a full percentage point cheaper.

By switching to a lower rate, you'll instantly save money and you could use the amount you are saving to pay a little extra. But before you switch, you have to think about mortgage arrangement, valuation, broker and legal fees. The general rule is if you are getting an interest rate of between 4.25% and 4.5%, the arrangement fees can be up to £1,000 and if you get offered around 5%, the fees usually will be lower. Portman Building Society offers one of the cheapest two-year fixed rate deals but there is an arrangement fee of £499.

Many lenders are keen to get your business and will pay your fees or part of your fees if your remortgage. However, there may also be redemption fees to pay on your previous mortgage, especially if it is fixed or discount loan. Before leaping into a new loan, you have to work out when you will be in profit, once all the charges have been made.

Most lenders now offer what they call flexible mortgages or provide flexible facilities on all their products allowing you to overpay by up to 5% or 10% of the outstanding balance a year without being charged redemption fees. Although you can overpay with standard repayment mortgages usually up to a limited amount, flexible mortgages give you the option of being able to borrow money up to your agreed limit or take payment breaks if you need to.

Nationwide offers a flexible facility on all its mortgages. With its base rate repayment mortgage products you can pay off an unlimited amount at any time while with its fixed and discount mortgages, you can pay up to a maximum of £500 extra each month. Halifax offers a similar facility. You can pay up to 10% of the outstanding balance on any of its mortgages a year either by making extra payments each month or with a lump sum without incurring charges.

Paying a bit extra a month can make a substantial difference to your finances. For example, with Coventry's flexible mortgage, currently charging 4.7%, if you overpaid £100 a month on a £100,000 mortgage with a 25 year-term, you would repay the loan six years, four months early and save nearly £20,000. The total cost of the mortgage would fall to £151,447 down from £171,036. With many endowment mortgages failing to hit their investment targets, this can be a good way of making up the shortfall.

The easiest way to increase your payments is through a direct debit. You also have to make sure that your lender calculates interest payments on a daily basis. If your lender calculates interest on an annual basis, you're not getting the best from your money because your repayments including any additional sums will be sitting around doing nothing until the lender's financial year end.

Current account mortgages or offset mortgages, originally from Australia, are designed specifically to help you shake of the mortgage burden earlier. The drawback is that you need some savings and it helps if you have money left over at the end of the month.

How it works is that your current account and mortgage work in tandem and any money in the current account or savings pot goes towards reducing the mortgage. With interest rates on savings low at around 4.86% gross for a best buy account and the mortgage base rate at 5.68%, you're getting the best value from your savings if you use them to offset the interest on your mortgage. Interest on these types of mortgage is also calculated daily, so your debt is constantly being chipped away. On the other hand, if you need to access money it's readily available with a current account mortgage.

However, the interest rate on offset mortgages tends to be slightly higher than other types of mortgage. The Virgin One charges 5.7% but you can add in all your debts including personal loans and credit cards so you are paying one flat rate for all your outstanding balances.

10 November 2005 © Moneyextra.com

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