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How to become mortgage free By Hannah Ricci
What would you do if you won the lottery? The chances are that before you splashed out on holidays and cars, you would pay off your mortgage. It may not be the most exciting option, but with mortgage repayments our biggest monthly expense, Almost a third of British households are now owned outright, according to research from the Royal Bank of Scotland. And three quarters of these homeowners said paying off their mortgage was the single most important thing they have done to ensure a sense of contentment and security. Overpayment shaves off thousands Most of us take out a mortgage over 25 years and forget that this term isn't set in stone. The average age for becoming mortgage free has fallen rapidly in recent years to just 48 - down eight years from 56 in 2003. Paying off your mortgage early brings financial freedom and can save you thousands of pounds in interest. It also makes it easier to prepare for retirement and build a comfortable future for you and your family. John and Mary Brierly from Cheshire paid off their mortgage when they received an inheritance. If you receive an unexpected sum of money - perhaps a bonus at work, an inheritance, insurance payout or investment windfall - putting this into your mortgage is one of the best financial decisions you can make. It is important, however, to clear any outstanding credit cards or personal loans first, because these are likely to be on higher rates than your mortgage. The average bonus received last year was around £1,550 according to YouGov, yet only 2% of us planned use to this to make an overpayment on our mortgage - despite the fact it could shave thousands of pounds off the amount we repay. Worth considering when paying a lump sum into your mortgage is whether your lender will allow, or charge you. This will depend on the type of mortgage you have and will also be specific to your provider. Fixed-rate mortgages tend to penalise borrowers for overpaying and repaying early, whereas more flexible options, including offset and current account mortgages don't. Offset and current account mortgages The One Account and Intelligent Finance - winner of the 2006 Moneywise Mortgage Award in the offset mortgage category - are big players in the current account and offset market. However, more high street providers, including Clydesdale Bank (which came second in the awards) now offer this type of mortgage. With an offset mortgage your main current or savings account (or both) are linked to your mortgage and usually held with the mortgage lender. Your savings are offset against your debt, so that as your savings balance goes up, your mortgage balance goes down - and vice versa. Even if you only pay your standard monthly repayment, the balance in your savings acts to reduce your overall debt so that you pay less interest and your term is cut. Current account mortgages work in a similar way in that the balance of your savings and current account is offset against your mortgage. However, rather than your mortgage and current account being separate pots of money, they are combined into one account. These types of mortgages tend to be most beneficial for higher-rate taxpayers. They're also useful if you regularly receive bonuses at work, have substantial savings to offset, and like the idea of the built-in flexibility. However, they are often not so good for first-time buyers and homeowners with little spare cash. This is because the rates on offset mortgages are rarely the best on the market. If the rate and size of your monthly repayments is important to you, you're better off shopping around for lower interest rates. Last year, Avtah and Harminder Singh from Birmingham paid off their mortgage early using their One Account. They've since been able to borrow more money to help their son purchase his first home. Paying off a lump sum or opting for an offset mortgage isn't the only way to shed your mortgage early - regular overpayments of £200, £100, £50, or however much you can afford, will also make a difference to reducing the term of your loan and saving you thousands of pounds in interest. With sky-high house prices and rising interest rates, making regular overpayments may seem a tall order. However, by making a few adjustments to your finances you'll be surprised how much you can save without altering your lifestyle. You should also ensure you have a competitive deal on your mortgage. An estimated 70% of homeowners are paying their lender's standard variable rate. This can be as high as 7%, which understandably makes it difficult to overpay. Find the best mortgage for you Check the best-buy tables on Interactive Investor. If you switch to a better rate you could free up money to make regular overpayments. Most providers allow you to pay more than your normal monthly mortgage payments. How much you can overpay tends to vary between providers, so check how your mortgage provider operates. Reaching the end of your current mortgage deal is a good time to consider how you can reduce it with a lump sum. Older people who have small mortgages and a substantial amount in savings may want to consider using this to pay off their mortgage rather than remortgaging. Top tips The author of Pay Off Your Mortgage In Two Years, Graham Hooper says that the first step is to understand your mortgage. Think about the value of your home, the amount you have borrowed and the total you will be repaying. We often don't realise that our lenders are charging us compound interest. Say you borrow £100,000 on 6% over 25 years - you'll be paying back £193,200, nearly double the amount. If you can reduce your repayment term by half, you could save nearly £50,000 in interest. Reducing your mortgage with overpayments will require a great deal of commitment and organisation - but it will be worth it. You'll need to get used to strict budgeting and be imaginative - perhaps take on another job or start your own business. It's also crucial to spread risk - don't commit every penny to your mortgage. Maintain savings and pension contributions for the future. Finally, if you decide to pay off your mortgage early you'll need to make it your top priority. It's a decision that requires discipline and hard work.
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