Should I pay off my mortgage early even if I have to pay a penalty?

admin
1 September 2014

Q

I am in a position to pay off my mortgage but there is an early penalty charge, amounting to £4,750. There is another year to run on the fixed-rate deal and if I continue with it, I will pay £6,500. Should I pay off the mortgage now?
From
DS/Somerset

A

It is important to understand the terms and conditions of a mortgage, and this doesn’t usually entail reading through long documents of small print and legal gobbledegook.

Instead, when you first take out a mortgage you are presented with a Key Facts Illustration. All mortgage lenders follow a similar format, making it easier to compare one mortgage deal with another.

These documents cover issues such as the overall cost of the mortgage including your monthly repayments, the rate of interest and the way it is charged, what happens if interest rates rise and how this affects your repayments, if there are any special features of the mortgage, if you can make overpayments to the mortgage and any penalties for doing so, and what happens if you don’t want the mortgage any more.

I recommend that you refer to this document and, specifically, the sections about overpayments and full repayment. Fixed-rate mortgages often come with an exit penalty during the fixed-rate period. This is sometimes a fixed amount and sometimes a reducing amount and once you are out of the fixed- rate period the charge will often fall away.

If you are paying £541.66 per month as mortgage payments, how much of this is mortgage interest and how much is the repayment part?

My experience is that people often see the whole monthly amount as a cost but remember that with the repayment part, you are reducing your debt. It is the interest aspect that is the real cost.

Jason Witcombe is an independent financial adviser at Evolve Financial Planning

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