How To Pay Your Mortgage Down Early

Paying down a mortgage feels good. If you can afford to, you may be able to trim years off yours.

This can reduce the amount of interest you pay and save you money. Not to mention the feeling of increased financial freedom.

Here are some ways to pay down your mortgage early and what to consider.

Ways to pay down your mortgage early

An extra principle payment is extra money you pay towards your mortgage above your standard monthly payment.

1. Regular over payments

There are two ways to set up regular extra payments on your mortgage:

Contact your lender and ask them to increase how much they automatically take from you each month
Set up a recurring transfer to make additional payments each month

You can cancel or amend the amount you pay as part of your extra payment. Check with your lender to see what methods they allow for regular over payments if you’re unsure.

2. Lump sum payment

If you’d prefer to pay a little extra into your mortgage now and again, rather than in regular monthly payments, you could consider making lump sum payments.

How much extra can you pay towards your mortgage?

The amount you can overpay without incurring any fees will depend on the type of mortgage you have. It’s important to check how much extra you can pay off with your lender, so you can avoid any pre payment penalties.

If you’re on a fixed interest rate – most lenders will let you pay up to 10% of your loan balance each year without incurring a pre payment penalty. This is known as an annual over payment allowance (AOA). Going over your AOA could incur a pre payment penalty.
If you’re on a variable interest rate – most lenders allow you to make unlimited over payments without incurring a pre payment penalty.

You should always check how much extra you’ll be able to pay before deciding on any over payments as the terms will vary by lender.

What are the benefits of paying more towards your mortgage?

With a repayment mortgage, your standard monthly payment includes an interest payment, as well as a chunk of what you owe the lender.

An extra payment, however, goes directly towards reducing your mortgage balance (assuming there are no arrears). This means:

You’ll pay less interest on your balance over the course of your mortgage
Your original mortgage term may shorten, allowing you to finish paying off your mortgage earlier
You won’t be paying interest for as long, potentially saving you thousands of dollars

Should you overpay on your mortgage?

While making over payments can be a great option, there are some things to consider first:

Does your mortgage allow you to make overpayments?

You'll need to check if your mortgage has a pre payment penalty before deciding if and how much to over pay.

Do you have an emergency fund?

If you don’t already, it’s a good idea to have an emergency fund before paying extra towards your mortgage. Ideally, your savings fund should cover 3-6 months’ worth of living costs. This way, you can account for any unexpected bills or emergencies that crop up.

Do you have expensive debts to pay?

Credit cards, overdrafts, and loans tend to have higher interest rates than mortgages. You should consider paying off these expensive debts before overpaying on your mortgage.

How to make over payments and additional payments

If your bank or lender allows over payments, you may be able to set up autopay or transfer a lump sum over the phone to your mortgage account.

Think carefully before securing other debts against your home.

How to pay your mortgage down early