Early Repayment
The jargon used for paying back part or all of your mortgage (other than the monthly payments) is called "early redemption". Most lenders apply a penalty if you do this during the initial period of the mortgage.
A mortgage that applies early redemption penalties is not necessarily a problem, it really depends on your own requirements and expectations about the future. You do need to think ahead and consider how long you are likely to keep the property - it's its just 2 years then it would seem rather foolish to take out a mortgage that would apply early redemption penalties beyond 2 years.
Early Redemption Penalties
These vary between lenders considerably - typically it would be 1-6 months of your interest payments (but calculated at the lenders current variable interest rate). Sometimes it may be a percentage of the loan - up to around 6%. Cash-back mortgages may require full repayment of the "cash back"
Other Costs
A lender may also apply administration fees for altering your mortgage or providing information or legal documentation.
Paying off a mortgage
The proper number crunching would need to be done, but in broad terms we encourage clients to repay a mortgage as quickly as possible. If you have a lump sum from an inheritance, gift or windfall you only have 4 real choices about what to do with the money. You could spend it, give it away, invest it or clear off your debts. Whether you spend it or give it away is up to you, but when it comes to a choice between investing the money or using it to repay debt we would tend to favour repaying debt (which includes a mortgage).
Reasons to repay a mortgage
- A Guaranteed Return
- No matter what investment returns or interest rates do, you will have effectively repaid your mortgage at your current rate.
- Free Up Income
- Not having monthly mortgage payments means that you have income to do other things.
- The real amount of income saved is not merely the monthly repayment cost, but the taxable income needed in order to pay it. For example a monthly mortgage payment of £900 requires a taxable monthly income of nearly £1200 (£14,400 per annum for a basic rate taxpayer) just to maintain payments at the current level.
- Reduce Stress
- No mortgage means less stress and pressure to earn enough to pay the mortgage. Having money for other things may also help alleviate some anxiety.This helps you to have more choices in deciding how to live your life.