If you have some spare cash, you could consider overpaying your mortgage. If you’ve never thought about it before and you are wondering whether you should overpay your mortgage, read on to find out.
What are the advantages?
There are two clear advantages of making overpayments when possible.
You will pay less interest
The amount of interest you pay is dependent on the outstanding balance. So if the balance is reduced by overpayments, the total interest you pay will be reduced.
You will reduce the mortgage term
The regular payments are based on a total mortgage term which is the time taken to repay the amount in full. This term is agreed on when you sign the contract. Increased payments will therefore reduce the term.
Is it worth it?
Imagine a mortgage worth £150,000 with an annual interest rate of 3% over a 25-year term.
If you made regular monthly overpayments of £100 on top of your normal repayments, you would save £11,843 in interest and reduce your mortgage term by 4 years and 3 months.
If you made a £15,000 lump sum payment you would save £15,116 in interest and reduce your mortgage term by 3 years and 6 months.
What are the disadvantages?
When considering whether you should overpay your mortgage, the obvious answer is ‘yes’ when looking at how much you can save.
However, there are some possible disadvantages that you should be aware of.
Your lender may not allow it
If you want to make overpayments, check to make sure it’s permitted with your particular type of mortgage.
If you are looking for a mortgage and you think you may want to make overpayments in the future, double-check with the lender before signing the agreement.
There is usually a limit
Typically, lenders will allow you to overpay up to a specific amount every year. It’s usually around 10% of the outstanding balance. If you exceed this limit you will have to pay an early repayment charge (ERC).
It is worth calculating how much you want to pay in a given year. This will prevent you from being charged fees which will reduce any savings you make.
It may be better to clear other debts
While it can seem like a burden, a mortgage is one of the cheapest ways to borrow money.
Make sure your extra cash could not be put to better use before you commit to overpayment. This includes paying off high-interest credit cards or loans. It is worth paying these types of debts off first because they are expensive ways to borrow money.
Once it’s gone, it’s gone
Before making any overpayments, make sure you won’t need the money for something else. Once you have given the lender your money it could be difficult for you to get it back.
Using all of your spare cash for overpayments may seem like a good idea. But doing this could reduce your ability to deal with any financial emergencies that life throws at you.
It’s probably a good idea to check your personal finances first. Making sure you have an emergency fund and you are up-to-date with your pension contributions is advisable.
How can I go about making overpayments?
Start by working out how much you want to pay. Be realistic about what you can afford.
Contact your lender and ask about their terms and conditions. They will let you know if overpayments are allowed and any annual limits that apply.
You will then need to decide whether to pay a lump sum or regular monthly payments. Lenders will often allow you to make payments over the phone or via an app.
Finally
So, should you overpay your mortgage? It will depend on your personal circumstances. Make sure you do what is right for you. If you are unsure about what is possible, contact your lender for some guidance.
If you are in the process of looking for a mortgage, check out our complete guide to mortgages.
