There are not many things in life that people bend over backwards to get, then once they have it spend the next few decades trying to rid themselves of it again - but a mortgage is definitely one of them.
The madness of a mortgage
For some reason, 25 years has become a key length of time when it comes to mortgages. Traditionally, this was the period over which lenders expected borrowers to repay their loan, so affordability was calculated accordingly.
For example, if you have a £200,000 repayment mortgage priced at 6.5%, the lender will ask for £1,350.41 for each month over 25 years, which amounts to 300 payments. Though you probably don't want to know, the final figure you will pay back under these circumstances is an eye-watering £405,124.30 - more than double what you borrowed.
But these days, borrowers are not tied down to this unfavourable situation and the arbitrary nature of a 25-year term is increasingly being recognised. As a homeowner, you are now in control of your mortgage debt and can choose to pay it off more quickly than a quarter of a century. With some mortgage deals in fact, you can pay it off as soon as you are able. So how do you go about it?
Find out more about flexible mortgages
Chip, chip, chip away
The majority of lenders now allow mortgage customers to make overpayments at no cost on a monthly or yearly basis.
For example, Nationwide permits borrowers to overpay by an extra £500 each month, regardless of your mortgage balance, while the Cheshire Building Society sets down a fixed limit of £5,000 per year.
Other lenders work in percentage terms. The Yorkshire Building Society, for example, allows borrowers an overpayment facility of 10% of the original balance each year, while with Stroud & Swindon, borrowers can repay up to 25% of their mortgage during the period in which early redemption charges (ERCs) apply.
Using this increasingly-standard facility offered by lenders and overpaying by just £100 a month on a £200,000 mortgage priced at 6.5%, you would repay a more respectable total of £368,915.78 back to the lender. That means an interest saving of £36,208.52 and being mortgage-free 3.8 years ahead of 'schedule'.
Get professional mortgage advice now
Pay in your bonus
In addition to lenders' blanket policies on overpayments, borrowers can look for specific deals that allow you to pour even more money into your mortgage at no penalty such as large annual bonuses or an inheritance.
The best example of this type of mortgage is a lifetime tracker which is offered by lenders like the Woolwich, C&G and Hinkley & Rugby Building Society.
A lifetime tracker is linked to the Bank of England base rate so its rate will be variable for the course of the term. But in return the borrower receives total flexibility and ERCs will not be incurred even if you redeem the entire loan. The Woolwich is currently offering a rate of base plus 0.27% on its lifetime tracker deal (current pay rate 6.02%) with a 60% loan to value. For borrowers with a 20% deposit, the rate is higher at base plus 0.37%, making a current pay rate of 6.12%.
With this facility you can pour any amount of annual bonus into your mortgage at no cost. For example, if you put a lump sum of £5,000 into your £200,000 mortgage (payable at 6.5%) you would save around £6,380 in interest and be able to redeem the loan 0.7 years early. Paying a £20,000 lump sum into the same £200,000 loan in year 12 of the mortgage term would save you considerably bigger £22,713.10 in interest and mean paying of your mortgage 2.6 years early.
Find a mortgage that meets your needs
Take an offset mortgage
Take fully flexible mortgages one stage further than this, and you will arrive at the offset mortgage.
These products allow you to reduce the interest payable on your mortgage by offsetting the debt against your credit balances such as savings and current account. For example, if you had a mortgage of £200,000 and savings of £10,000, interest would only be payable on the remaining sum of £190,000.
The effect of this arrangement over the long term means you don't have to make any "overpayments" at all in order to reduce the interest and duration of the mortgage term. A borrower with the same £200,000 mortgage but with £10,000 in savings £1,000 in a current account balance offsetting against it, would redeem their mortgage one year and three months early.
Better still, they would repay a total of £374, 400 opposed to the standard £412, 652. That's a saving of £38, 252 - and without doing a thing.
If you combined offsetting and overpaying, you would score even more points against the lender.
Using the above example, but overpaying by £300 a month you would be mortgage-free in just 18 years and 10 months and repay a total of £310,042. This is overall saving of £102, 610 in monetary terms and six years, two months in freedom terms, which flies in the face of the traditional, inflexible shackles that was a 25-year mortgage.
Unlock your pension
Another way to free yourself from the noose of your mortgage ahead of time is to unlock your pension.
Following changes to pension rules last year, you may now gain access to your pension while continuing to work. Homeowners aged 50 or over may withdraw up to 25% of their pension in the form of a tax-free lump sum, leaving the rest of the fund intact.
This money could be used to pay into your mortgage and potentially, wave goodbye to debt for the remainder of your life.
However, as a pension is supposed to represent an income in retirement, this is not a move to be taken lightly and you should always take independent financial advice if you are considering such a move.
Related links
Read more from MoneyExtra.com
Find out more about flexible mortgages
Get professional mortgage advice now
Find the right mortgage for you here
Offset mortgages explained
