At the age of 62, Sir Keir Starmer is sitting pretty. From next month, his bank balance will be higher because there is one less monthly bill he has to pay.
That’s because, 20 years after he took it out, the Prime Minister has paid off the mortgage on his £2million North London townhouse, finishing paying his loan five years earlier than is standard 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 indicated last July that he was feeling the pain of interest rates going up on his Barclays Bank home loan.
Most of us are not so lucky. Jinesh Vohra, who runs mortgage overpayment app Sprive, says that with the average first-time buyer now 31 and the average mortgage length 32 years, most of us will be paying our mortgages ‘well into our sixties’.
‘However, there are things you can do to get mortgage free quicker,’ he says.
Keir Starmer and his wife Victoria achieved what many homeowners can only dream of when their £2million North London property officially became mortgage-free
Paying off your mortgage early can save you thousands of pounds in interest as well as providing a huge boost to your financial wellbeing. But, even if you can afford to, it isn’t the right answer for everyone.
‘Homeowners should also consider whether these funds could be more effectively used elsewhere,’ explains Pete Mugleston, mortgage expert at onlinemortgageadviser.co.uk.
If you decide to join Sir Keir and pay off your mortgage early, you’ll need to negotiate the rules set by your lender to avoid potential penalties, as well as deciding whether the security of 100 per cent ownership is worth trading for a lack of financial flexibility and potentially high returns from other sources.
The maths of mortgage overpayment
For most of us, our mortgage will be the biggest 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 far bigger loans.
Overpaying can take years off the amount of time you’ll be paying a mortgage and save thousands of pounds in interest by putting more money towards your loan every month than is required.
For example, on a mortgage of £185,000 with a 25-year term and a 4.93 per cent interest rate (the current UK average for a two-year fix), a £100 a month overpayment to your lender would see you paying the mortgage off three years and nine months early. Over that time, you’d save almost £23,700 in interest payments.
Overpaying is increasingly popular. As rates rose last year, the Bank of England disclosed that 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 was paying more than we needed to into a mortgage.
Vohra, whose app is designed to make overpaying simpler, says the average user cuts their mortgage term by four years and saves £10,000 in interest. Couples save over £15,500 – a substantial sum.
But as well as saving money over time, making overpayments can also help you to get a cheaper deal when you’re refixing your home loan.
Mortgage companies are willing to give cheaper deals to those who own a higher percentage of their home, so overpaying so that you fall into a preferential bracket for a new mortgage can get you a better deal.
According to Moneyfactscompare, which looks at deals available across the market, the best mortgage rate available for 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 per cent of their home’s value, it is 3.99 per cent. On £185,000 of borrowing over 25 years, the borrower on the lower rate would pay £100 a month less on the same sized loan, at £975 against £1,075.
Small print and pitfalls
Paying off your mortgage may not be as easy as you think, however. Lenders don’t like giving up on their mortgage interest payments, and often place restrictions on how quickly you can pay off your loan.
‘Many lenders may charge early repayment fees (ERCs) if you exceed a certain overpayment limit, usually 10 per cent of the outstanding balance per year,’ explains Mugleston, at onlinemortgageadviser.co.uk.
These fees can be substantial, as they are often expressed as a percentage of the entire home loan and can be as high as five per cent.
However, there are some mortgages that do not have these fees, and you can also pay off a percentage of your mortgage without paying charges when you come to the end of a deal before going on to another one.
As well as early repayment charges, those who make mortgage overpayments may end up with a lack of flexibility in their finances if circumstances change, as it is typically difficult to claw back money you have overpaid into a mortgage unless you choose one with flexible features.
Wealth management expert Charles Incledon from Bowmore Wealth says that paying off your mortgage early but then finding you haven’t got enough money to live on is a particular problem if you are older and can’t remortgage to get the money out again.
He says homeowners in these situations are turning to equity release – a more expensive way to release capital from your house.
‘Equity release is growing in popularity and more and more people are having to use it,’ he says. ‘But why are they having to use it? Because they’ve paid off their mortgage, they’ve retired, and then they realise that although they can live in their house mortgage free, they don’t have enough income to live on so they take equity out of their home. It just doesn’t make any sense.’
Opting for a flexible mortgage, such as one that allows you to offset your savings against the balance of your home loan, can help you to save money but retain the flexibility to get your cash back out. However, these mortgages are typically more expensive. Barclays offers an offset mortgage at 6.22 per cent, for example, well above the average mortgage rate.
Sir Keir rehearses his keynote speech before the Labour Party Conference earlier this month
Could your money do more?
Incledon, at Bowmore, says that many people who choose to pay off their mortgages, like Sir Keir, could be making their money work harder elsewhere and retaining flexibility for their retirement.
This could include paying more money into pensions and Isas, where the money can grow tax-free, and the return may be higher than by paying debt off a mortgage. However, this depends on your mortgage rate. If you have locked into a deal in the last couple of years while rates have been high, it is likely to be harder to achieve investment returns that exceed your loan rate than when rates were lower.
Meanwhile, if you think your property is going to go up in value, by owning less of it you are making more of a return on the investment you are making, because you will still benefit from the full amount of capital growth on the mortgaged part of the property.
‘I could be paying off my mortgage, but that isn’t actually providing me with any more return on property,’ says Incledon.
‘By saving into pensions and Isas and all the rest of it, making use of legitimate tax shelters, you are going to be increasing your overall net worth and providing yourself with far more flexibility when it comes to generating a retirement income.’
He adds that the UK’s fondness for paying down mortgages is due to us being a very debt averse nation.
‘People need to think it through properly,’ he says.
‘It’s all good and well having a house that you have no debts on, but if you haven’t got investable assets that can provide you with a passive income, then you’ve got no money to live.’
Of course, for many of us, paying off the mortgage is about more than simply making the most logical financial choice – paying off a mortgage can give you a feeling of freedom as well as saving you thousands of pounds in interest.
’It depends on your personal financial goals and risk tolerance,’ says Vohra, asked whether paying off a mortgage is always the right decision.
‘You should seek professional advice on which is better for your own circumstances.’
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