3 Effective Strategies for Paying Off Your Mortgage Faster

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Paying off your mortgage will help ease off the burden on your pocket and help you gain financial freedom sooner. The longer repayment length of a mortgage makes you vulnerable as your financial situation can be turned upside down. Although mortgage lenders take this factor into account when signing off on your mortgage, the risk is inevitable. Many people find it a smart move to pay off their mortgages earlier.

In the excitement of being debt-free sooner, you might jump the gun. Unfortunately, early repayments are subject to an opportunity cost you will bear in terms of delaying other financial goals.

Key points

  • You can save a lot of money on interest payments.
  • Your overall borrowing cost will be reduced.
  • It might not always be a good idea if you have other high-interest debts.
  • You will end up with insufficient savings by making early payments.

Evaluating your financial situation is the key

There are a lot of things to consider before choosing to start making payments earlier. Your action of earlier payments will immediately affect your budget. Financial experts suggest considering the following consequences before making a decision.

  • Your savings will be reduced. Chances are you will face difficulty meeting unexpected expenses.
  • You will take a while to actualise your wealth goals.
  • You will attract early repayment fees. Make sure the extra money you pay is not more than you save on interest.

Ask yourself the following questions to appreciate the consequences of early repayments:

  • Do you have enough income to pay off your mortgage earlier?

Paying off your mortgage sooner means having extra cash. Refinancing will let you avail yourself of lower interest rates, but closing costs of your current mortgage will be paid up front. Figure out if you have the wherewithal to make higher payments.

  • Do you have a sufficed emergency cushion?

Financial experts recommend three to six months’ worth of living expenses to meet unforeseen expenses. On no account is an insufficient emergency corpus advised. Early settlement of your mortgage will rock your rainy-day savings. You may be laid off, or you may come across some sort of medical emergency. You will end up borrowing money when you do not have savings to fall back on. As a result, your debt obligation will escalate.

  • Do you have other debts to pay off?

Most people normally take out a mortgage when they are debt-free, but after a few months, it is not normal to see them owing other debts. Credit card bills and other small loans carry high-interest rates. You are good to go if you are definite about your ability to tackle these loans along with larger mortgage payments.

Talk to a financial advisor to be apprised of the implications of early repayments on your finances.

Strategies for paying off your mortgage sooner

Here are the strategies you should consider paying off your mortgage faster:

  • Refinance but for a shorter term

You can refinance your mortgage when you are closer to the end of your fixed mortgage deal. It will enable you to qualify for lower interest rates if you manage to pay down payments on time through the fixed interest-rate period deal.

It will also help shorten the loan term. Refinancing will take you nowhere if you choose to borrow a larger sum and a longer repayment period to keep your monthly payments small.

By choosing a shorter repayment period, your monthly payments will increase but the total cost of your mortgage will be much lower. Ideal circumstances to refinance your mortgage are when:

  • Your fixed mortgage deal is about to expire.
  • Your credit score is good.

Mortgage lenders will not know your preferences about the term length and the size of monthly payments. Therefore, you should research the market before putting in the application for refinancing. Choose a smaller repayment term provided your budget can accommodate your monthly payments.

Top tip: you will have to pay the closing costs of your current mortgage. Current interest rates will decide whether or not it is the right time to refinance, as you will be put on the standard variable rates. Refinancing is advisable for those whose credit score is good. If you had mortgages for people with bad credit, your lender’s decision would not be so favourable despite you made all fixed interest-rate payments on time.

  • Making extra payments

Refinancing is not an ideal option for all mortgage buyers. Moreover, it can be expensive and time-consuming in specific circumstances. A simpler alternative to settle your mortgage faster is making extra payments. You can make extra payments using the following three methods:

  • You can make extra payments every month. Paying extra money each month will lower your mortgage amount. It will help you save a lot of money in interest payments.
  • You can make bi-weekly payments. Bi-weekly payments mean you will pay twice every month. It means you will make one extra payment each month, automatically reducing the amount of your mortgage.
  • You can make a lump sum payment. If you have got a windfall or inherited money, you can use that sum to pay down a large chunk of your mortgage at once. It will lower your debt size.

Use an online calculator to know how much it will save you money in interest payments. Use a bad credit mortgage calculator if your credit report was not good when you applied for a mortgage.

Top tip: paying extra is an ideal option for those borrowers who are on variable incomes and have no up-to-snuff credit scores. However, you should make extra payments only when there is an influx of cash in the form of windfall, inheritance, etc. A few lenders charge early repayment fees to make extra payments. Confirm if that is true in your case before paying more than the due amount. Your bank will charge fees for converting payments from monthly to bi-weekly.

  • Set up an offset account

You will be given a chance to set up an offset account linked to your mortgage when you buy your house. The balance in this account will offset your mortgage balance and, therefore, reduce your interest payments. The returns you get on your investments are generally higher than the mortgage interest rates.  It allows you to invest your extra payments to earn higher returns. You are even absolutely free to use the balance in your brokerage account for emergencies or other purposes.

Top tip: investing in a brokerage account is subject to risk. Stock market is extremely volatile. You may have to bear the losses if the market does not move smoothly. Be ready to pay taxes on dividends and capital gains by selling the stocks. This strategy may provide you with flexibility, but it is ideal for those who do not get perturbed by the market’s ups and downs.

The bottom line

By settling your mortgage faster, you can save a lot of money in interest payments. But you should carefully plan a course of action to avoid any problems down the line. Remember that the aforementioned ways are subject to risks. Weigh up all the pros and cons carefully before making a decision.

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