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Lets say I buy a house worth £350k with a mortgage of 30 years.
Down-payment of £50k and monthly £1250 with 3% interest.

After 5 years I realized I can afford £5k monthly, can I pay off some debt to save some interest? I am planing this because in case everything goes south I can pay £1250 anyway, but if everything goes well maybe I pay off mortgage as much as it goes smoothly.

  • In the US, that is always possible. In Germany, this is generally not allowed. So it could be either way in the UK - anything is possible. You need to check the specific bank's conditions. – Aganju Mar 28 '16 at 23:00
  • You can also get an offset mortgage. Then you can put money in a savings account, which reduces interest payable. Benefit is you can still access that money if you need to (with your interest going back up). – SMeznaric Mar 29 '16 at 15:13
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If you selected a mortgage that allows additional payments to be credited against the principal rather than as early payment of normal installments, them yes, doing so will reduce the actual cost of the loan. You may have to explicitly instruct the bank to use the money this way each time, if prepay is their default assumption.

Check with your lender, and/or read the terms of your mortgage, to find out if this is allowed and how to do it.

If your mortgage doesn't allow additional payments against the principal, you may want to consider refinancing into a mortgage which does, or into a mortgage with shorter term and higher monthly payments, to obtain the same lower cost (modulo closing costs on the new mortgage; run the numbers.)

  • Good point for mentioning refinance to get a mortgage that allows early payoff, if his does not. – jkuz Mar 30 '16 at 13:41
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First, check with your lender to see if the terms of the loan allow early payoff.

If you are able to payoff early without penalty, with the numbers you are posting, I would hesitate to refinance. This is simply because if you actually do pay 5k/month on this loan you will have it paid off so quickly that refinancing will probably not save you much money. Back-of-the-napkin math at 5k/month has you paying 60k pounds a year, which will payoff in about 5 years.

Even if you can afford 5k/month, I would recommend not paying extra on this debt ahead of other high-interest debt or saving in a tax-advantaged retirement account.

If these other things are being taken care of, and you have liquid assets (cash) for emergencies, I would recommend paying off the mortgage without refinancing.

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Check the terms of your mortgage.

If you are in a fixed-term mortgage, you can likely "over-pay" a fixed amount of the capital each year: typically 10%. Eg if you owe £300,000 on the mortgage, you can pay off an additional £30,000 this year. Next year you'd owe something like £260,000 so could pay off £26,000. You'd need to check the terms of your mortgage to see what this limit is. You can actually pay off more than this, but would become liable to pay an "early repayment fee" or similar, which is usually something like 3-5% of the mortgage amount. Note that this usually means you would need to re-finance the mortgage anyway

If you are not on a fixed-term mortgage than, in the UK at least, you are pretty much free to over-pay as much as you would like or refinance the mortgage.

If you are in a fixed-term mortgage, it is usually better to simply over-pay by that maximum allowed amount until the fixed period ends, at which point you can re-finance onto a mortgage that allows higher overpayments. This isn't always the case, though, depending on your interest rate, how high the early repayment charge is, and how much you are able to over-pay. At the very least, you're going to need to do some sums!

If you do choose to over-pay up to the limit, then you'd want to over-pay as much as you can at the start of the year (ie don't divide the over-payment by 12, pay it all as early as you can) to reduce interest payments. Then once you hit the limit, put the rest into a savings account: once you are out of the fixed term you can then pay the rest as a lump sum when refinancing.

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