How to 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 money

At 62, Sir Keir Starmer is sitting pretty. From next month, his bank balance will be higher because he has one less monthly bill to pay.

That’s because, 20 years after he pulled it out, the Prime Minister has paid off the mortgage on his £2million north London mansion, paying off his loan five years earlier than is usual for a British property owner.

Sir Keir now joins the lucky third of the population who don’t have to spend money on rent or mortgage payments, a relief for him after he said last July he was feeling the pain of rising rates on his mortgage loan with Barclays Bank. .

Most of us aren’t so lucky. Jinesh Vohra, who runs mortgage overpayment app Sprive, says that with the average first-time buyer being 31 years old and the average mortgage term 32 years, most of us will be paying our mortgages “well into our 60s.”

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

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

‘Homeowners should also consider whether this money 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 will need to negotiate the rules set out by your lender to avoid potential penalties, and you will also need to decide whether the security of 100 percent ownership is worth it worth trading for a lack of financial security. financial flexibility and potentially high returns from other sources.

The math of mortgage overpayments

For most of us, our mortgage will be the largest debt we ever have. 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 take years before you pay off a mortgage and save thousands in interest by putting more money on your loan than necessary each month.

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 term), an overpayment of £100 per month to your lender would result in that you pay the mortgage. three years and nine months earlier. In that time you will save almost £23,700 in interest payments.

Paying too much is becoming increasingly popular. As interest rates rose last year, the Bank of England revealed a record £6.7 billion was spent on mortgage overpayments in the first three months of 2023, while Barclays Bank said one in four of us were paying more than was needed for a mortgage.

Vohra, whose app is designed to make overpayments easier, says the average user will reduce the term of their mortgage by four years and save £10,000 in interest. Couples save more than €15,500 – a significant amount.

But in addition to saving money over time, making too many payments can also help you get a cheaper deal when you refinance your home loan.

Mortgage companies are willing to give cheaper deals to those who own a higher percentage of their home, so if you overpay to put yourself in a preferential bracket for a new mortgage, you may get a better deal.

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

Small print and pitfalls

However, paying off your mortgage is not as easy as you think. Lenders don’t like to give up on their mortgage interest payments and often place limits on how quickly you can pay off your loan.

‘Many lenders may charge early repayment charges (ERCs) if you exceed a certain overpayment limit, usually 10 per cent of the outstanding balance per year,’ explains Mugleston on onlinemortgageadviser.co.uk.

These costs can be significant because they are often expressed as a percentage of the entire home loan and can be as high as five percent.

However, there are some mortgages where these charges do not apply, and you can also pay off a percentage of your mortgage without paying any fees if you get to the end of one deal before moving on to another.

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

Wealth management expert Charles Incledon of Bowmore Wealth says paying off your mortgage early, only to find 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 back out. to get.

He says homeowners in these situations turn to equity releases – a more expensive way to release capital from your home.

“Equity release is becoming more and more popular and more and more people need to take advantage of it,” he says. ‘But why should they use it? Because they’ve paid off their mortgage, retired, and then they realize that even though they can live in their house mortgage-free, they don’t have enough income to live on, so they take the equity out of their house. It just doesn’t make any sense.’

By choosing a flexible mortgage, such as one that allows you to offset your savings against your home loan balance, you can save money but still have the flexibility to get your money back. However, these mortgages are usually more expensive. For example, Barclays offers an offset mortgage of 6.22 percent, well above the average mortgage rate.

Can your money do more?

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

This could include spending more money on pensions and Isas, where the money can grow tax-free and the returns can be higher than from paying off debt on a mortgage. However, this depends on your mortgage interest rate. If you closed a deal in recent years while interest rates were high, it’s likely harder to earn investment returns that exceed your loan rate than if interest rates were lower.

Meanwhile, if you think your property will increase in value, owning less of it can give you a better return on the investment you make because you still benefit from the full capital appreciation on the mortgage portion. of the property.

“I could pay off my mortgage, but that doesn’t actually give me a return on real estate,” Incledon says.

‘By saving into pensions, Isas and all the rest, and using legitimate tax shelters, you will increase your overall wealth and give you much more flexibility when it comes to generating retirement income.’

He adds that Britain’s penchant for paying down mortgages is due to the fact that we are a very debt-averse country.

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

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

Of course, for many of us, paying off the mortgage means more than just making the most logical financial choice; Paying off a mortgage can give you a sense of freedom and save you thousands of dollars in interest.

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

‘You should seek professional advice about what is best for your own circumstances.’