Pay off the loan as soon as you can

Paying off the mortgage as soon as possible is the top financial goal for nearly half of today's homebuyers, according to a new report from the Woolwich.

Mortgage rates are generally higher than those paid on savings accounts, so it pays to use any spare cash to pay off all or part of your loan, as long as you have already paid off more expensive debt such as credit cards.

So, how can you go about it?

How much will I save?

A £100,000 loan can be paid off six years early by paying in an extra £100 per month. David Hollingworth, of mortgage broker London & Country Mortgages, says a 25-year £100,000 repayment loan at 5% would normally cost £584.59 a month. Pay in an extra £100 a month, and you would reduce the term by six years and two months and save £20,921 in interest.

Will the lender let me do it?

Before going ahead, it's crucial to check if your lender will allow you to pay extra, either as a lump sum or monthly overpayments, without imposing penalties.

If you are on a special deal which charges early redemption penalties for paying off the mortgage before the end of the lock-in period, you may be unable to pay off anything at all without a hefty penalty. This is certainly the case with many smaller lenders.

But lock-in deals from most of the major lenders, including Abbey National, Halifax, Nationwide and Cheltenham & Gloucester now let you pay a proportion of the capital off early - typically up to 10% a year - without penalty.

Making a lump sum payment?

Check how your lender calculates interest on your mortgage. If it's calculated daily any overpayment you make will be deducted from your capital loan and interest charged on the reduced balance immediately. But if interest is calculated annually - at lenders including Alliance & Leicester, Bristol & West and NatWest, for example, then overpayments won't benefit you until the following year.

And while the biggest lenders are now switching to daily interest calculations, do check that your particular mortgage is treated this way. "Just because your lender is currently on daily interest, it doesn't mean your mortgage will be. The policy may only affect newer products," warns Ray Boulger of independent financial adviser Charcol.

If interest is still calculated annually on your loan, you'll generally be better off saving your overpayments up - in an interest-paying account of course - and making ad-hoc lump sum repayments. The minimum accepted is typically around £500.

What are the pitfalls?

"Do make it clear that you are making a repayment of capital and not an advance payment of interest which is what their computer will assume if you don't tell them," Mr Boulger says. Ask for the lump sum to be taken off your capital balance owed now and for your monthly repayments to be recalculated.

On the practical front, if monthly overpayments are an option, check with your lender how best to make them. Some lenders will be willing to increase your direct debit payment if you intend to make regular overpayments. If not, then set up a separate standing order and if you want to overpay on an ad hoc basis, then pay extra by cheque.

What about remortgaging?

When striving to reduce your mortgage, regularly review your arrangements to make sure you are paying the best rate. "If you could remortgage to a lower rate, this would give you the ability to overpay by keeping your monthly payment at the same level," Mr Boulger says.

Take the example of someone with a 25-year, £100,000 repayment mortgage at an SVR of 5.95%, costing £641.25 per month, who remortgages after two years to Yorkshire Building Society's 3.85% two-year tracker, cutting the monthly payments to £546.65.

Mr Hollingworth calculates that if the borrower maintained their original £641.25 payments, they would cut the term by 19 months and save £7,121 in interest, assuming no other remortgaging took place and the rate reverts to Yorkshire's SVR of 5.45% after two years.

But if the borrower could maintain the 3.85% rate by regularly reviewing their mortgage, shopping around for the best deals and remortgaging every two or three years, then they would save £11,983 and cut the term by four years and 11 months.

"Clearly it is important to remember to regularly remortgage," says Mr Hollingworth whose firm has recently launched a free service - Mortgage Prompt - which reminds borrowers to start looking at remortgage schemes three months before the end of their discount or fix. For details, call 0800-953-0313.

Reducing the mortgage term

If you are confident that you'll be able to afford to pay extra each month for the forseeable future, then another way of paying off your mortgage more quickly - and saving thousands of pounds in interest to boot - is to reduce the term.

For example, a £100,000 repayment loan at 5% over a typical 25-year term would cost £584.59 a month and the total interest charge would be £75,377. If, however, you arranged to cut the term to 20 years, the monthly payment would increase to £659.96, but the total interest charge would fall to £58,390 - saving £16,987.

New 'all in one' mortgages

Flexible mortgages are specially designed to allow you to make overpayments without penalty, but they won't suit everyone. If the only feature you want from a mortgage is the ability to overpay, it may not be worth your while taking a flexible loan where you will probably be paying a premium in the form of higher interest for unused facilities such as payment holidays.

Current account mortgages - an enhanced version of flexible mortgages which can help you pay off your mortgage more quickly by offsetting any money you have in savings and current accounts against your capital loan and charging you interest on the net balance - again rarely offer cutting-edge rates and may only pay if you have substantial savings.