What is a...

Lump Sum Reduction

A Lump Sum Reduction is the term used if you wish to pay off a large part of your mortgage early.

Is there a downside to paying off a large chunk of my mortgage with a lump sum?

Be careful and always ask whether there is an early repayment penalty before you do this. Any redemption penalties are likely to be tied to the length of time the agreement has been in place. For example, you may pay 5% of the balance in the first year then 4% in the second year and so forth. This is done to recoup money lost on potential interest charges which would have been paid over the agreed term now reduced by the early repayment.

An example of this would be if you have received a lump sum as part of your pension. You could use this amount to clear your existing mortgage and reduce your monthly outgoings and more importantly end the repayments which are subject to interest accrual.

Will paying off my mortgage increase my Credit Rating?

It’s important to understand that fully paying and closing any credit agreement – including a mortgage – can actually reduce its positive influence on your Credit Report. This is because prospective lenders look at your active credit agreements to determine how reliable a borrower you are likely to be; closing an account simply reduces your body of evidence showing how well you manage your accounts.

As long as your mortgage account has been paid on time each month, you can expect it to contribute positively to your Credit Rating, regardless of whether it’s open or closed. Importantly though, the positive influence will be greater while the account is active.

You can use checkmyfile to view your Multi Agency Credit Report, with data from Equifax, Experian and TransUnion, together in the same format. It’s free for 30 days, then just £14.99 per month. Cancel online anytime without fuss.

Can a Lump Sum Reduction save me money?

Potentially, but that depends on whether early repayment penalties apply and, if so, how much they would cost when compared to how much of your mortgage is left to pay off.

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