There has long been a debate over whether or not homeowners should repay their mortgages early. In some cases, the answer is as easy as checking loan documents to see if a mortgage has an early repayment charge. It is not so easy in other cases. Deciding whether to repay early or not requires a few calculations.
This article will illustrate how you can make thousands of pounds by repaying early and putting your money elsewhere. Making the most of this strategy includes obtaining your mortgage through a reputable mortgage brokerage rather than going directly to your bank.
Using a Mortgage Broker
We start with the assumption of using a mortgage broker for the simple reason that brokers have access to a variety of mortgage products. Assuming you use an independent broker rather than a tied or multi-tied broker, he or she will have access to virtually every mortgage on the market. That includes deals that are not available through banks.
Maximising the amount of money you can make by paying early rests a lot on your interest rate. So the point here is to use a mortgage broker to find you a deal with the lowest possible rate.
How Mortgage Interest is Calculated
Mortgage interest it is calculated annually. This is key to understanding the money-making principle. Let’s say you obtain a £150,000 mortgage at 5%. You will pay 5% interest for the entire first year based on the opening value of your loan – £150,000. At the conclusion of the first year, a new interest amount will be calculated by multiplying what you still owe by that same 5%. As you can see, you do not pay 5% in total. You pay 5% every year.
Making Money by Paying Early
Part of the debate over paying early is whether the extra money you’re putting into your mortgage could make you more money elsewhere. It is not uncommon for financial advisers to recommend you keep paying your mortgage as normal and put the extra money into investments. So let’s run some calculations.
Let us say you obtain that same £150,000 for 20 years at 3.8%. Your monthly payments will be £982.27. Assuming you continue paying for 20 years, your total interest payments will add up to £101,616.97. So without even adding in insurance, taxes, etc., you will have paid more than £251,000 on a £150,000 mortgage.
Perhaps you have an extra £200 per month to put toward your mortgage. Your adviser tells you to put the money into an investment vehicle that gets 5% instead. Why? Because at 5% return is higher than your 3.8% interest rate. It sounds good until you do the calculations.
If you put that £200 into a 5% investment for 20 years, you will have just over £83,800 to work with. But what if you put it toward paying off your mortgage instead? You will pay off your mortgage five years earlier and save £17,291 just in interest alone. If you then take your regular monthly mortgage payment, plus the £200 extra and invest it in that same investment for five years at 5%, you’ll end up with just over £83,802.
At first glance it would appear as though you only made £2 more by repaying your mortgage early. But you cannot look at it that way. To figure out your entire profit or loss, you have to subtract the amount of mortgage interest paid from the return on your investment. Based on the numbers here, you are still coming out more than £17,000 ahead by paying your mortgage early.
Finding a Good Deal
Now that you know how it all works, it’s time to talk about how to find a good mortgage deal. Again, we go back to the mortgage broker. An independent mortgage broker can scour the entire market looking for a deal that fits your needs perfectly. That is what mortgage brokers do.
Mortgage brokers have an incentive to find good deals for their clients. The more successful they are in doing so, the more likely their clients will recommend them to others and even return themselves in the future. So you can bet a broker is going to do his or her best to find you the lowest possible rate.
You can make money by paying your mortgage early and then putting your monthly payments into an investment vehicle. The sooner you pay your mortgage off, the more money you will have to invest. And in the end, a mortgage broker can help you take maximum advantage of your opportunities by helping you find the best possible deal.