AS he logged into his banking app to check his mortgage balance, Andrew Thirkill felt a wave of relief wash over him: it had finally hit £0.
The 63-year-old business owner from Bradford, beamed. By clearing his mortgage, he had halved his outgoings and could now work part-time as he approached retirement. While it might feel out of reach, we explain how he did it and, crucially, how you can too – with just £25 a month.
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“I feel elated,” he said. “Paying off my mortgage was always in the back of my mind. Now that I’ve paid it off, that worry is gone.”
Everyone’s dream is to become mortgage-free, but paying off your loan quicker may feel impossible as the cost of living continues to bite.
But you don’t need bags of cash to become mortgage-free faster – our tricks can save you thousands and you only need £25 a month, the price of a cheeky Friday night takeaway.
What’s happening with mortgages?
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Mortgage costs could soar for millions of borrowers in the coming weeks as government borrowing costs have jumped to their highest level in 28 years.
The yield (which means the interest rate), on ten-year government gilts is now 5.88 per cent, the highest level since March 1998.
Gilts are a type of loan the government borrows from investors and promises to repay with interest.
Gilts are important when it comes to mortgages, because they are used by lenders to price fixed rate deals.
So when gilt yields rise, the cost to borrow money increases too.
David Hollingworth said: “There is every chance that interest rates will climb.
“Whether that is before the end of the year or into next is hard to call but if it comes sooner than anticipated it could even nudge fixed rates higher.”
The average two-year fixed mortgage rate is currently 5.59 per cent, according to MoneyfactsCompare.
On a £200,000 mortgage with a 25-year term, that makes monthly repayments £1,239 a month.
But the rate analyst has predicted that rates could climb to around 5.84% if interest rates were to rise.
That would make monthly repayments £1,269 – £30 a month, or £360 a year more.
As a result, now could be a good time to shop around for a new deal if you need to remortgage this year, instead of waiting for rates to rise.
So… how do you do it? Here’s our top tips.
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Falling onto your lender’s Standard Variable Rate (SVR) could cost you hundreds of pounds extra each month.
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Trick to save £8,339 and you only need £25 a month
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One of the quickest ways to be mortgage-free is to make overpayments on your mortgage.
This is when you pay more than your required monthly amount.
David Hollingworth from the mortgage broker L&C Mortgages said: “Even small overpayments will add up over time and help to reduce the overall interest bill and could repay the mortgage early.”
If you overpaid your £200,000 mortgage by £25 a month – the price of a Friday night takeaway – then you could save £8,339 in interest and repay your deal 12 months early.
But before you race to overpay, check the rules of your mortgage.
Most home loans allow you to overpay your balance by 10 per cent a year, but NatWest and the Royal Bank of Scotland let you overpay 20 per cent.
But if you exceed this level then you will be hit with an early repayment charge, which can be up to 5 per cent of your remaining loan.
Handy apps to download NOW
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If you struggle to save, apps can help you.
For example, Sprive allows you to earn cashback on your purchases, which you can then send directly to your mortgage lender as an overpayment.
The average Sprive user in London overpaid their mortgage by £61 a month, which would save them £12,660 in interest and cut 18 months off a typical 25-year mortgage term.
You could try switching on a round-up feature in your bank app, if it has one.
Every time you make a purchase, your bank will round-up your spending, and move the extra change to a savings account.
Apps such as Chip and Moneybox offer this feature. Moneybox says its customers save £12.37 a week on average from round-ups.
Then, at the end of the month, you could empty your account and use the savings to overpay your mortgage.
Shorten your mortgage term to save £105,000
Consider shortening your mortgage term, which is the length of time you agreed to pay back your loan.
You can do this when you remortgage and take out a new mortgage deal or by asking your lender to re-run your affordability calculations to ensure you can keep up with repayments.
By shortening your term your monthly payments will increase but you will save money in interest in the long term and clear your debt faster.
David Hollingworth explains: “Consider the month-to-month affordability carefully.
“If there’s a chance it could be a stretch in the future, tweak the number of years you knock off the term or consider whether overpaying may be more flexible.”
If you had a £200,000 mortgage which had an interest rate of 4.75 per cent then your repayments would be £932 a month over 40 years.
If you were able to shorten the term to 25 years then your monthly repayments would increase to £1,140 – £208 more.
Over 40 years you would pay £247,130 in interest, but this falls to £142,069 over 25 years – saving you £105,000 in interest.
But doing this is risky as if your financial situation worsens then you may not be able to keep up with the repayments and your lender might not allow you to increase your mortgage term.
Pay your deal off in one year
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We all want to become debt free but doing so before retirement is especially important.
Aaron Strutt, from the broker Trinity Financial, said: “If you are older then it’s harder and could cost you more money to get a mortgage because the interest rate will be higher.
“If the mortgage runs into the later years of your job, the lender is going to ask a lot more questions, and that’s when it gets more difficult to remortgage.”
One way to clear your home loan is to use your pension lump sum.
You can usually take up to 25 per cent of your private pension pot as a tax-free lump sum, up to a limit of £268,275.
But first, make sure this is the right option for you.
Catherine Foot, director of the Standard Life Centre for the Future of Retirement, said: “Everyone’s circumstances will be different and this is an area where it pays to do your homework or seek professional advice.
“For example, withdrawing a sizeable sum from your pension to pay off a modest ongoing repayment means you’re giving up the potential for your pension to grow and people need to think carefully about how long their money may need to last.”
This is what Andrew did as the interest-only mortgage on his three-bedroom terraced house was set to mature in April 2027, just before he turns 65.
An interest only mortgage is where you only pay the interest on the amount you borrowed each month and repay the full balance at the end of the term.
At this point Andrew would need to repay his balance in full as his lender, the Bank of Ireland, has restrictions on what it will lend to older people.
Andrew said: “It was getting closer and I was constantly reminded that I need to pay the money back.”
Andrew used £20,000 of his existing savings and his tax-free lump sum to withdraw £18,500 from his Royal London pension pot.
He was charged income tax on his pension withdrawal at 20 per cent but was able to get a £4,000 refund after claiming a tax rebate from HMRC.
Paying off his mortgage allowed Andrew to halve his monthly outgoings from £1,370 to £520.
For Andrew, using his lump sum to pay off his mortgage was a no-brainer.
“For me this felt like the perfect decision,” he said. “I intend to carry on working and running my business knowing I have more flexibility in retirement.”
How to get the best deal on a mortgage
There are different factors that go into getting the best mortgage rate. Chris Sykes, technical director at broker Private Finance explains what you need to know.
- Bigger deposit
The larger the deposit you have the lower the rates you’ll have access to.
The different deposit tiers offered by lenders are generally 0-1% deposit, 5%, 10%, 15%, then generally it skips to 25% and finally cash or equity of 40% or more.
There are some exceptions in between but these are usually the bands.
Lenders then set different rates for each of these tiers, rather than having one rate for a 12% deposit and another for 14%, for example.
With a deposit above 40% there is usually no price fluctuation, which means you’d get the same rate with a 50% deposit to a 40% deposit.
- Keep your credit score healthy
A better credit score doesn’t necessarily mean more competitive deals, but a negative credit could mean worse deals.
For example, there may be some people with not a lot of credit as they’ve never had a credit card, or loan, will get the exact some deal as someone who has more credit history and a better credit score.
However, a bad credit history or score starts to limit your lenders and means you may need to move off high street to a more specialist lender which tends to offer higher rates.
If you have poor credit, look for easy ways to improve it.
- Look six months before your fix ends
It’s best to look at deals six months before a current rate ends. This might be to just have a chat with a broker and get things moving.
It might be that you can get a deal lined up and locked in that protects against movements in interest rates – for example if rates were to go up over the following six months. And you can also then improve the rate within that six months if rates were to go down.
- How to find a good broker
A good mortgage broker is invaluable for navigating the options available to you.
The best way to find a good adviser is through personal recommendations, everyone has a friend or family member who will have recently bought or refinanced – ask them who they used and if they were happy with the service.
You can also lookup reviews of that person online to find other customer experiences too. Unbiased.co.uk is one place where people can offer their reviews.
- Sort your paperwork
IF you are looking to buy or remortgage, contact a broker nice and early, as they can then guide you through what the expectations are from lenders.
This gives you plenty of time to make sure your accounts are up to date if you’re self-employed and you can see if it is worth filing tax returns early.