CLEARING the mortgage is a target for many borrowers dreaming of financial freedom.
However, with a few shrewd money moves, the debt-free milestone could be closer than you might imagine.
Paying off your mortgage could mean hundreds of pounds in extra cash freed each month, which can be put towards other bills or spent on luxuries such as holidays.
Paying back borrowing is all the more important when interest rates are higher.
The Bank of England base rate is at its highest level in 15 years, which has in turn made mortgages more costly.
Nicholas Mendes, mortgage technical manager at broker John Charcol, has helped hundreds of clients pay off their loan earlier than planned.
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Here, he shares his top tips to become mortgage free faster.
Make the most of your home
If you have a spare room, renting it out to a lodger can earn thousands of pounds in extra cash.
If the money is used to overpay the mortgage, it will chop down the time it takes to pay off your mortgage.
Under the government’s Rent a Room scheme you can earn up to £7,500 a year tax-free from letting out a room in your home.
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Nicholas says: “If you’re not ready for a full-time live-in guest, you could use AirBnB to rent out a room for a couple of nights a month.
“Even making £50 a month adds up to £600 over a year.”
Paying off £50 a month on a £200,000 mortgage at a rate of 4.5% on a 25 year term would slice almost two years off your mortgage, according to calculations by Nicholas.
It would also save £11,520 in interest.
Overpay your mortgage
A sure fire way to becoming mortgage free faster is by upping your monthly mortgage repayments.
Most lenders will let you repay at least 10% more than your repayments before charging any early repayment charges.
Nicholas says borrowers can increase their monthly direct debit so the money is automatically taken on a regular basis – even if you only up the repayment by £10 or £20 you will save on interest.
Or you can make lump sum payments when cash is available – this could be useful for people who work on commission or get an annual bonus.
Nicholas says anyone still on a low fixed rate taken out before more recent rate rises should make the most of it.
He adds: “If you can afford to do it, overpaying when you are on a lower rate means that more of your money will go towards eroding the underlying debt.
“When you come to remortgage, you will then have a smaller debt to pay interest on.”
The earlier you repay your mortgage, the more you save in interest – these savings can then be used to further cut down the debt.
Nicholas says that it’s also worth checking the terms of your mortgage.
Lenders typically allow repayments of up to 10% a year – but some will allow as much as 30% giving you more leeway if you can afford it to reduce your mortgage.
Target a lower loan to value
Overpaying your mortgage could have the added benefit of putting you on a lower loan to value (LTV) tier with your mortgage.
You loan to value is how much deposit or equity you have versus how you have borrowed from the lender.
If you put down a deposit of £40,000 on a £200,000 property, you have a 20% LTV.
And as you build up more equity in your property, lenders reward you with lower borrowing rates.
A lower rate, again, gives you more space to make overpayments to chip away at the debt.
Nicholas says: “If you have a year or two left on your mortgage, it could be worth working out how much you’d have to overpay to get to a lower loan to value.
“By making that overpayment and getting a better rate further down the line could save you hundreds of pounds.”
Pick your remortgage deal carefully
Mortgage rates are much higher now than they were just a couple of years ago.
It means that it’s more important than ever to get the very best rate you can.
Nicholas says: “Don’t just stay with the same lender.
“Even a rate difference of 0.2% can have a huge difference in how much interest you will pay and how much easier it is to clear the debt earlier.”
Some of the lowest rate mortgage deals come with costly product fees.
However, the cheaper rate can be worth paying for, according to Nicholas.
A good independent mortgage broker should be able to search the market for you and find the best deal for your circumstances.
A professional will also be able to work out when it’s more beneficial to pay a high fee for a lower rate.
Remortgaging is also an opportunity to knock time off your mortgage term. For example, taking out a 20-year-term instead of a 25-year-term, Nicholas says.
Opting for a lower term pushes up your repayments in the first instance but it means that overall you pay less interest on the debt and pay it off sooner.
Nicholas adds: “Try to shave off a year or two, if you can afford it.
“Adjust your budget accordingly and you will naturally pay off your debt a lot earlier.
Update your EPC
If you’ve made any energy efficiency changes to your home it could be worth paying out for a new energy performance certificate (EPC) for your home.
Nicholas says: “Lenders are really mindful about making things sustainable.
“If you have a EPC of C or above, you could get lower rates through a green mortgage from some lenders.
“Lower interest rates potentially can then give you flexibility to make the overpayments that will see you become mortgage free sooner.”
For example, Virgin Money currently has a competitive green five-year fixed at 5.22% with a £995 fee.
You can use some of your disposable income to overpay your mortgage.
But you should still keep some savings aside for a rainy day, says Nicholas.
An offset mortgage is one way of using savings to lower the interest you pay and still having cash available should you need it.
For example, if you have a £250,000 offset mortgage and £50,000 in the savings account linked to the deal, you will only pay interest on £200,000 of the loan.
These products are usually best for people who have big savings, according to Nicholas.
If you are saving for a big event such as a wedding or perhaps a home extension, the cash could work in an offset mortgage.
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He adds: "Offset mortgages are typically more expensive – so you'd usually need to have a large amount in savings to make them worthwhile."
A mortgage adviser should be able to help work out if the deal is suitable to your circumstances.
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