View the article online at http://citywire.co.uk/money/article/a997151
My path to financial freedom: overpaying the mortgage
Michelle McGagh's no spend year made her realise she could cut years off her mortgage, opening up new possibilities.
‘I bet you go on a mad spending spree when it’s finished’ was a common phrase I heard during my no spend year.
People assumed after a year of not buying anything I’d be rushing out to the nearest shopping centre to blow the lot on a designer wardrobe. And while I did need to replace some well-worn, and worn-through, pieces of clothing the end of the year was not the shop-a-thon many predicted.
You see, I didn’t actually have a massive pile of cash to splash. I’d been doing something much more sensible (and some have said boring) with the money I wasn’t spending: I was overpaying my mortgage.
I live in London and mortgages aren’t small; my own was just a shade over £230,000 at the start of the challenge and over the year I reduced it by nearly 10%.
The majority of people fell into two camps when they found out what I’d done with the cash.
Firstly, those who didn’t know you could overpay and secondly, those who didn’t know why you’d want to.
The first group are easier to deal with than the second in my experience!
Overpaying isn’t something the banks like to shout about because it means less money for them. Typically you can overpay around 10% of your mortgage a year, or £500 per month (although you should check the terms of your mortgage for details).
By overpaying your mortgage you are chopping down the number of years you need to keep paying for it and reducing the amount of interest you pay over the term of your mortgage.
Let’s take the example of a £200,000 mortgage over 25 years on a rate of 2%. On this deal you’d pay £848 per month for the next 25 years (assuming you stay on the same rate, of course).
Now let’s look at what happen if you overpay your mortgage. So as well as paying your £848 a month, you overpay an extra £200 - a total of £1048 a month.
Doing this would mean you pay off your mortgage three years and three months earlier and it would save you £7,648 in interest over the term of your mortgage. That’s quite a saving.
The monetary saving is a good way to answer those who ask why on earth you’d overpay. Who doesn’t want to save over £7,000? Personally, the less money I can give to the bank the better.
But the idea of overpaying for me is bigger than just making a saving. I want to knock years off my mortgage because I don’t want to be obligated to work all the hours God sends just to pay it off.
Yes I need somewhere to live, and yes I’m grateful I’m even on the property ladder but I don’t want my whole life to revolve around my mortgage.
By paying off my mortgage early, I’d get rid of my biggest outgoing and would only have to cover my bills, food and spending money (and we all know I can live on a tiny amount!). If I only had to cover these costs then I could work far less, I could maybe even work half the year and volunteer or travel or do something other than the 9-to-5.
Surely that’s really living?
It’s not going to happen overnight. It’s not even going to happen in the next five years but at age 34 I feel I’m able to see a way out of the office treadmill that so many of us are on.
If giving up treats and luxuries, and cutting back my spending will help me make the giant leap to financial freedom, then that’s a price worth paying.
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by Daniel Grote on Apr 24, 2017 at 15:42