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20 Apr 2018

How to pay off your mortgage early

Five tips to help you become mortgage-free sooner

UK homeowners celebrated 'Mortgage Freedom Day' earlier this week, according to Halifax - but how can you become mortgage-free more quickly?

Halifax declared Monday 16 April as this year's 'Mortgage Freedom Day', the day when the average UK homeowner has earned enough so far in the year to cover their annual mortgage payments.

However, the prospect of becoming genuinely mortgage-free can feel a long way off for most people. Here, we explain the research and outline steps you can take to bring the day when you've paid off your entire home loan a little closer.

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When is your 'mortgage freedom' day?

Halifax's research, which is based on average annual mortgage payments of £8,039 and net incomes of £27,724, highlighted significant differences between regions - with some areas lagging months behind others.

For example, homeowners in Northern Ireland had already earned enough to cover their entire annual mortgage payments by 10 March, while those in London will have to wait until 13 June.

Earliest 'mortgage freedom' days

Copeland, North West24 February
Inverclyde, Scotland27 February
North Ayrshire, Scotland27 February
West Dumbartonshire, Scotland1 March
Renfrewshire, Scotland1 March

Latest 'mortgage freedom' days

Brent, London11 August
Haringey, London9 August
Harrow, London30 July
Elmbridge, South East25 July
Hillingdon, London25 July

'Mortgage freedom' days by country

Norhern Ireland10 March
Scotland15 March
Wales1 April
England9 May

How to pay off your mortgage early

While the concept of mortgage freedom day offers an insight into regional differences in affordability, there are a host of factors influencing how affordable your home loan really is in comparison to your earnings.

Indeed, for some homeowners, mortgages are at their most affordable level in a long time.

Whileinterest rates on mortgages have started to creep up of late, in many cases they still remain very low - perhaps offering borrowers the opportunity to pump a little more cash into their mortgage and pay off their debt more quickly.

Below, we offer our top five tips on getting ahead of the game with your mortgage payments and bringing your own 'mortgage freedom' day a little closer.

1) Remortgage to get the best deal

Many homeowners are paying far too much for their mortgage as they aren't on the best possible deal.

This is particularly the case for those who have reached the end of their fixed-rate deals and have been moved on to their lender'sstandard-variable rate (SVR), which tends to be much more expensive.

With this in mind, it's important to look into remortgaging before your introductory rate period ends. You can usually agree a new mortgage up to six months in advance, and finding the right deal could save you thousands.

2) Consider overpaying

Savings rates remain unappealingly low, so if you've got some cash to spare it could make sense to overpay on your mortgage.

Overpaying will mean you pay your debt off quicker, and pay less in interest along the way.

Overpaying isn't right for everyone, though. While many mortgage deals will let you pay up to 10% of your balance as an overpayment each year, some lenders will charge a fee for this, which will wipe out some of the financial benefits ofoverpaying.

It's also important not to throw all of your savings into your mortgage, and to ensure you have sufficient cash set aside for any emergencies or unexpected bills.

3) Offset your savings

Another way of making the most of your savings is to consider offsetting them against your mortgage.

Offset mortgages are linked to savings accounts, and involve interest being calculated on how much you borrow, minus how much you have saved in your linked account. This means you'll effectively be overpaying your mortgage each month.

For example, if you have a £200,000 mortgage and £5,000 in a linked savings account, you'll only pay interest on the £195,000.

If this mortgage charged 3% interest over 25 years, you could pay off your loan a year early and save a little under £5,500.

On the flip side, you won't be able to earn interest on your savings, and with a smaller number of offset deals on the market these days, you may find that these mortgages are more expensive than others.

4) Reduce your mortgage term

In theory, overpaying and shortening the length of your mortgage have the same result, though the former allows you to pay lump sums when you're able to and the latter means an increase to your regular monthly repayments.

Reducing your term will entail a formal agreement between you and your lender. This makes it best suited to homeowners who, perhaps due to a change in financial circumstances, can definitely afford to pay more every month.

Again, reducing your mortgage term will allow you to become debt-free earlier, but it's important not to get carried away and over-stretch yourself.

5) Pay your mortgage fees at the start

Some mortgages come with significant feesattached, but lenders will often allow buyers to add these to the overall loan rather than paying them up front.

For cash-strapped home-buyers and owners, this might seem like a good idea. But the cost can spiral as you'll be paying interest until your overall mortgage debt is repaid.

This means that a fairly innocuous product fee of £1,000 at the start of your mortgage could end up costing you many hundreds of pounds more by the time you pay it off.