Should I pay off mortgage before lender ups the interest rate?

Q&A: Mortgages are the cheapest money to borrow but clearing the debt can make sense

I have a mortgage which is due to end in March 2023. Currently the fixed interest is 2.9 per cent, which is due to expire on April 1st, whereupon the interest will move to variable interest. I turn 70 in May, hopefully, so I will not be seeking any form of financial loans.

My question is that if I were to pay it off today, which is only over €6,000, would that be in my best interest?

Ms M.C., email

Perhaps it is because a mortgage is likely the largest financial burden most of us are ever likely to assume, it seems to weigh more heavily than in should at times. The circumstances in your question are quite specific because of the very short time remaining on your loan, but it is nonetheless an opportunity to look at the broader issues that need to be considered in weighing up such a decision.

For all that we worry about mortgages, it remains true that it is the cheapest money you will ever borrow.

You only have one year left on the mortgage in any case, so you must have a fairly clear view on whether you will need to borrow for anything else within that 12 months

You are currently paying 2.9 per cent on your mortgage: you can get fixed rates as low as 1.95 per cent in the current market. The cheapest personal loan, for comparison, charges 6.4 per cent.

So, in pure financial terms, it is a very simple equation. If you are going to pay back a loan on which you are being charged 2.9 per cent early, you need to be sure that you are not going to be borrowing money within the original mortgage period at a higher rate – say 6.4 per cent – for any other purpose.

Weighing your options

In your individual case, this is quite easy to assess. You only have one year left on the mortgage in any case, so you must have a fairly clear view on whether you will need to borrow for anything else within that 12 months. If you do, don’t repay the mortgage early.

Any borrowings you might face after the mortgage matures are really irrelevant because weighing the balance of financial benefit is an issue only when there are two competing uses for the money: the mortgage versus other spending. Once the mortgage is paid off, the debate is over.

But what if you don’t plan on borrowing for anything else in the remaining 12 months of the mortgage?

The standard advice for people with lenders looking to impose a non-competitive mortgage rate is to consider switching

In that case, the dynamic changes, not least because you say your lender will move you to its variable rate in April when your 2.9 per cent fixed rate comes to an end.

In your case, that variable rate appears to be 3.7 per cent. So, if you do nothing and let the mortgage wend its way to conclusion over the next year, you will be paying more interest than you are currently. That doesn’t seem to make sense.

The standard advice for people with lenders looking to impose a non-competitive mortgage rate is to consider switching. And, in general, that is very good advice. However, it won’t work for you.

Repay the loan

Switching saves money but only over time as you benefit from the lower interest rate secured. There are up-front costs involved with switching, including valuation and legal fees. So, for someone in your specific set of circumstances – only around €6,000 owing and just one year left on the mortgage – switching is not a sensible alternative.

That leaves you with the option of early repayment. And, for you, this is what will make most sense. If you have no intention of borrowing money for anything else over the next year and you have the €6,000 to hand, you should use it to pay off what is left of your home loan.

You might not be able to do it while you are tied to the current fixed rate. Well, that’s not quite true; you will be able to do it but the lender might charge you for whatever interest they lose out over the remaining six weeks or so of the fixed rate. So the best thing is probably to wait until the very end of your fixed period and then, before the higher variable interest rate has time to accumulate, pay off the loan.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.