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If you do want to pay your mortgage off earlier there are huge savings to be made, because the longer you have a mortgage for, the more interest you pay.
If you have a mortgage of £100,000 and your interest rate is 3% then you will pay £3,000 a year of interest for every year you have the loan. Cutting the amount of time you pay, also reduces the interest you pay.
Switching your monthly mortgage payment to a bi-weekly payment schedule could save you £49,118 in interest and also shave four years, nine months off your mortgage.
Mojo Mortgages, has calculated that by switching to bi-weekly payments, mortgage borrowers end up paying 26 half-payments, equivalent to 13 months.
To calculate these figures, they analysed the average house price and bi-weekly mortgage payment* to predict the potential interest savings across the UK, uncovering that:
- The national average interest savings from bi-weekly payments is £49,118.
- On average, bi-weekly payments shorten the mortgage term by 4 years and 9 months.
- Greater London offers the largest financial savings, reducing interest by £92,200 on an average house price of £511,279.
- Even regions with lower house prices, like Northern Ireland (£168,791), see significant savings of £30,440.
- Making annual overpayments in areas like East of England and Yorkshire & The Humber can reduce mortgage terms by as much as 5 years and 3 months.
Most mortgage lenders will charge an early repayment penalty if a borrower is able to clear their loan earlier, this fee can often catch out Brits.
This is known as an early repayment charge (ERC) and may be charged by your mortgage lender if you overpay on your mortgage by too much a year or pay it off too ealry.
The ERC is charged at a percentage of the outstanding mortgage and typically between 1% and 5%, explained independent financial adviser provider Unbiased.
Nick Green of Unbiased said: “It may not look much, for example 1% might not look like a huge penalty, it is still a lot if your outstanding balance is high (for example, 1% on a £200,000 loan is £2,000).”
Unbiased said some lenders reduce the ERC as the deal comes to and end, for example someone with £75,000 left to pay on a three-year fixed-rate mortgage with a 2% ERC for the first year, may go down to 1% for the following year.
If they repay or switch deals in the first year of their mortgage, the borrower will pay an ERC of £1,500.
But if they repay or switch in the following year, you pay £750. If you wait until the third year, there is no ERC to pay.
