How to pay off your Mortgage Quicker

Most banks and financial advisers will advise you to pay extra money into your mortgage. Subject to you being able to afford it, this is sound advice and you should listen to their wise words. By making additional payments towards your mortgage debt, you can often cut down the interest debt and subsequently reduce the mortgage period.

E.g., if you borrow £200 000 over 30 years at a rate of 5%, your monthly repayments would be approximately £1074. Over 30 years, the actual sum you will pay (£1074 x 360 months) is £386,640.00. That's an astonishing £186,640.00 in interest alone.

Now what if you could afford to repay an extra £246 a month, (total monthly payment £1320), you would actually cut 10 years off the mortgage repayment period. In essence you could be mortgage free 10 years earlier than anticipated and the total sum payable would be £316,664.00 providing a saving of £69,756.00. Not bad hey!

The only weakness in this theory is that, the real value of money is not taken into consideration. As we are all aware the value of money depreciates over time, some say it nearly halves in value every 20 years. So make sure you seek the advice of a financial specialist before making any commitment.

A pound is always worth more today than a pound in 10 year's time. You cannot simply subtract the mortgage interest amount for a 20 year mortgage from the interest on a 30 year mortgage and class this as the final saving. You actually need to calculate the Present Value of each mortgage option. First repayment method:

The Present Value of a 30 year mortgage with repayments of £1074.00 at a 5% interest rate is £200,066.00. Second repayment method:

The Present Value of a 20 year mortgage with repayments of £1320.00 at a 5% interest rate is £200,066.00.

What if you took that £246.00 a month and invested it? If you could get a return of 10% per annum, in 20 years time you could have £186,804.00. With inflation at 3%, that would be worth £102,597.00 in today's money.

Obviously before making any financial commitment, you should seek the advice of a FSA Regulated Independent Financial Adviser, they will guide you on the most suited solutions for your current and future needs.

But why would the banks recommend that you pay off your mortgage in a shorter time frame? Surely the longer the payment period the better it is for the lender as they earn more interest on the mortgage sum originally lent?

The answer is that the banks love being able to prove that their recommendations will save you money, it provides free publicity “word of mouth”. But in reality don’t be fooled; the banks do understand the value of money over time. They know the true value of that extra £246 a month that you're proposing in giving them. Equally the shorter the repayment period the lower their risk to the mortgage lender.

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