Overpaying an interest-only mortgage is generally worth it to reduce the principal balance, save on total interest, and decrease the final lump sum due, but it reduces cash flexibility. It is most beneficial if your mortgage interest rate is higher than potential savings or investment returns.
Overpayments on interest only parts of your mortgage won't automatically reduce your monthly mortgage payment, unless you ask us to, but could save you money by reducing the amount of interest charged.
Repayment plans
If you have a lower interest rate on your mortgage than on your savings account (for example, your mortgage is 3% and your savings is 6%), it makes financial sense to save with the higher interest rate savings account rather than overpay your mortgage.
If your mortgage rate is similar or higher than your savings rate, overpaying can be beneficial. Considering the current financial climate can help you make your decision. For example, if interest levels on saving deposit accounts are low, using spare cash to pay extra on your mortgage may make more sense.
👎 Drawbacks of Interest-Only Mortgages
With interest-only, you're only paying to borrow, not own. So, unless the market adds value to your home, you won't be building any equity. If prices drop, you could even end up owing more than your home's worth – a bit like paying rent but with a big bill waiting at the end!
Switch to a repayment mortgage
If you have sufficient time before your interest-only mortgage ends, ask your lender to switch it to a repayment mortgage. This will increase your monthly payments but endure that the balance is repaid at the end of the term.
Interest-only repayments
Once the agreed interest-only period ends, you'll start repaying your principal at the current interest rate at that time. As you're not making payments on the 'principal', this will remain the same, unless you choose to make additional repayments.
Overpayments directly reduce the outstanding loan balance, making the final repayment amount smaller or potentially allowing you to pay it off entirely before the term ends. When making overpayments, please be aware that you may have to pay an early repayment charge to your lender (if applicable).
Some mortgages may only allow you to overpay a certain amount each year or may charge a fee for overpayments. It is also essential to assess your overall budget to gauge if you can afford lower liquid savings. Overpaying your mortgage could mean that you have less cash available for other expenses or emergencies.
An interest-only loan allows you to make monthly payments of only the interest for a specific period of time without the principal (although you can always make extra principal payments). The advantage of an interest-only loan is a lower payment.
The 3-7-3 Rule in mortgages isn't a loan type but a federal timeline from the TILA-RESPA Integrated Disclosure (TRID) rule, ensuring borrower protection by mandating disclosures within 3 business days of application, a 7-business-day wait between the initial Loan Estimate and closing, and another 3-day wait if significant changes (like APR) occur, giving borrowers time to review costs before committing to a loan.
Yes, Dave Ramsey strongly advocates paying off your mortgage, calling it "Baby Step 6," because a debt-free house provides immense financial security, freedom, and a solid foundation for wealth, even arguing for it over investing at a low interest rate due to risk reduction and lifestyle benefits, though he stresses completing other steps like investing 15% first. He sees a paid-off home as a huge advantage for retirement, reducing stress and enabling career changes, and many millionaires follow this path.
Suze Orman strongly advocates paying off your mortgage by retirement for financial freedom and peace of mind, but her advice on how varies by situation, often prioritizing a solid emergency fund and retirement savings first, especially if interest rates are low. While she pushes for paying down debt aggressively (even reducing retirement savings beyond the 401(k) match), she cautions against draining savings for low-interest mortgages if it leaves you vulnerable to job loss or emergencies, suggesting you should have a strong safety net before using savings to pay it off.
The average age to pay off a mortgage in the U.S. is around 62, with many becoming mortgage-free in their early 60s, coinciding with or just after typical retirement age, though figures vary by source. While some financial experts suggest paying it off by 45 for aggressive investing, data shows a significant portion of homeowners, especially older ones (60+), are mortgage-free, but increasingly, older adults (60s, 70s, 80s) carry more mortgage debt than previous generations, according to Marketplace.
Peters explains that the biggest potential downside to an early mortgage payoff is what's called opportunity cost. “If you use extra cash to pay off your mortgage ahead of time, you may miss out on opportunities to invest that money and potentially earn a higher return, especially in a strong market,” he says.
Tips to pay off mortgage early
Not Putting Extra Payments Toward the Loan Principal
Otherwise, you may not see much progress in your early mortgage payoff efforts because your extra payments will be absorbed by interest.