In this brief blog we are going to discuss how to live mortgage free, what it takes and the plan we need to live mortgage free.
Most people want to live mortgage free at some point. Nobody wants to be paying off their mortgage until they are grey and die. The average mortgage costs £45,000 in interest over 25 years. Government figures show that the average mortgage-holder paid just over £8,000 last year in mortgage repayments. Clearing your mortgage will mean you have a lot more money in your account every month. Plus, you’ll save yourself a small fortune in interest payments. The average mortgage debt in the UK is £123,000, according to the Council of Mortgage Lenders. With an average interest rate of 2.63%, that means the average homeowner paid £3,154 interest on their mortgage last year.
To live mortgage free we need to make a suitable plan which will allow us to one day be mortgage free.
How to live mortgage free
Below we have provided a step by step guide on how you can one day see the last of monthly mortgage repayments for good.
Learn how to live mortgage free
The first thing we need to do is learn how to live mortgage free. This involves learning how mortgages work. How the interest rate on mortgages are charged and how the interest rate on your particular mortgage work. You also want to learn about the benefits of overpaying on your mortgage.
Set a mortgage free timeline and begin
The next phase on the howto live mortgage free plan is to set a timeline for when you want to be mortgage free. This could be 20 years, 30 years or maybe 5 years. This timeline is relevant but ultimately the amount you have saved up plus your monthly disposable income will ultimately decide how much you can pay towards your mortgage to become mortgage free.
Get your mortgage documents
At this stage on our step by step plan on how to live mortgage free you want to contact your mortgage provider and get information in regards to what interest you are being charged on your mortgage, how the interest on your mortgage is being charged, is this daily, monthly, weekly or annually. You also need to confirm from the mortgage provider if you are on a fixed-rate mortgage deal or a standard variable rate mortgage deal.
If you are on a fixed-rate mortgage then you want to confirm what your early repayment charge is and when your fixed-rate mortgage ends. Finally, you need to confirm if you can make overpayments on your mortgage and if so if there are any limits, caps or fees attached with making an overpayment on your mortgage. Most of this, if not all of this information should be on the key facts illustration document you would have received
Once you have received your mortgage debt you should either manually calculate how much you will need to overpay your mortgage by to live mortgage free based on when you think you will want to live mortgage free.
If you aren’t sure how to work this out then you should use a mortgage management platform as Huuti provides. This allows you to determine when you can essentially be mortgage free based on your current disposable income.
Refinancing all our debt
The next step on our how to live mortgage free plan is to ensure that we are paying the minimum we should be paying on all our current credit obligations. This means if you have car finance, personal loan, mortgage(which you have), homeowners loan or credit card you should look to refinance these credit products to a cheaper rate and take into consideration any early repayment fee. As you continue to make your repayments on your credit products your credit score will slowly increase, this may mean that you are now eligible for much cheaper credit products than the ones you took out months or years ago.
Ensuring you are plugged in with a system such as Huuti which analyses all your credit products to let you know if you can refinance them to cheaper credit products is key.
Remortgaging is the most important task here. As you continue to make your monthly mortgage repayments you will begin to buy more equity into your property. This means when you come to remortgage you could potentially be in line for a cheaper rate due to you having moved into a more favourable loan to value band
Cutting our expenses & budget
The next step on our how to live mortgage free plan is to ensure that we have cut any unnecessary expenses by analysing our spending from the past 3 months on all our bank accounts and marking transactions which we are never going to incur again until our how to live mortgage free plan is completed.
This could be restaurants, holidays, gyms or it could even be the costs of running your car.
Analyse where you could save and add up your potential savings. This is the first pot of money that will now go to overpaying your mortgage or building your savings to one day pay off your mortgage.
You should then analyse your income and set an amount which you will save each month.
Set up a standing order from the bank account which you receive your salary for this amount to either go towards your mortgage account or savings account on payday. This ensures that you are fully focussed on your how to live mortgage free plan and don’t get excited by that new watch or a new restaurant you saw recently.
Building your savings
If you already have savings then you should decide if you want to build your savings or use some if not all of that money to overpay your mortgage once you have remortgaged to the best rate or during a remortgage by essentially putting down an increased mortgage deposit during your remortgage- this means you will essentially be borrowing less and will have repaid a chunk of your mortgage.
Using all your savings to repay your mortgage may not be a good idea. We always want to have some savings in case will run into financial emergencies but in some cases, our credit cards could server as suitable emergency backups in case of any financial emergencies. This is only the case if we earn enough and have enough disposable income to be able to ake the monthly minimum repayment on our credit cards at leats or be able to repay the credit limits in full each month.
Whether you should continue saving or repay your mortgage will also depend on the current interest rates. If the interest rates on your savings is less than the interest rate on your mortgage and over a similar timeframe the interest earned on the savings vs the interest incurred on the mortgage is less then using your savings to pay off your mortgage is a good idea. If the situation is totally opposite then it may not be a good idea to use your savings to repay your mortgage.
Finally, you want to decide if it is a good idea to build your savings with your disposable income or if you want to put that money towards overpaying your mortgage. You can use the same opportunity cost principle in the paragraph above to decide on this.
Get an offset mortgage
It may be the case that savings are a better choice right now as overpaying your mortgage may have an opportunity cost (the interest earned on savings). In this case, you may be able to get an offset mortgage which essentially reduces the balance on which you are charged interest on and the monthly mortgage repayment you make. This doesn’t bring you much closer to living mortgage free per se, it only reduces the cost of your mortgage whilst you build your savings. The only downside is that you will have to move your savings to the lenders savings account and this may not offer the most competitive interest rates.
Increasing our income
Increasing your income is a key stage on the how to live mortgage free plan. It ensures you have a suitable income to put towards your savings or toward overpaying your mortgage. If your income increases, you should remember to go back and adjust your budget as this will likely give us a new timeline by which we will be mortgage free. If you use a mortgage management platform then this won’t be necessary.
Increasing our income could be done via getting a new job or taking on extra hours.
Managing our mortgage
Managing your mortgage is a key part on our step by step plan on how to live mortgage free. You should find a suitable mortgage management platform which allows you to monitor how much you can overpay your mortgage by, help you overpay your mortgage each month, provide you with an overview of when you will be mortgage free, how much interest you have saved by overpaying and allow you to remortgage to a cheaper mortgage deal when possible. Huuti’s mortgage management platform does all of this.
Using a mortgage broker to remortgage
You may want to consider using an independent mortgage broker to get a mortgage.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases. This could be over 11,000 mortgage products. This may have some advantages than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle. This will allow you to shop for your home easier as more estate agents and sellers may take you seriously or it will give you confidence that your remortgage is indeed a possibility before you make a full mortgage application. Once you have found a home you want to buy or are satisfied with the mortgage offer for your remortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document which details out the features of your mortgage including how much you will pay per month if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer. Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it, they will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer and set a completion date with the seller or their conveyancer.
In this blog, we discussed how to live mortgage free. We hope you have found it valuable and have learnt how to live mortgage free as well as begun to put some plans into action so you can one day make your last monthly mortgage repayment and be done with it forever.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.