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Are Mortgage Overpayments The Best Thing To Do?
If you find yourself in the situation of having some extra money to spare, then making an overpayment on your mortgage should definitely be a consideration. An overpayment will reduce your outstanding debt, shorten the mortgage term and the overall amount you ultimately pay for your home. It is not a straightforward decision however, and it might not always be the best thing to do. This guide explains when it is a good idea to overpay your mortgage and when it is not advised.
Making a mortgage overpayment means you pay more than the required monthly repayment amount, this could either be as a lump sum or you could set up a recurring additional payment.
Making overpayments builds the equity in your property faster thus reducing the overall amount of interest you will end up paying.
For example, if you have a ￡200,000 mortgage with a term of 25 years, at an interest rate of 4% your total loan would cost you ￡316,703 in total if you continued to pay the standard repayment amount each month. If however, you add a monthly overpayment of ￡200, the overall cost of the mortgage is cut to ￡285,635.55.
You would save around ￡31,000 in interest and cut around 6 years off the length of the mortgage term.
Generally speaking, making mortgage overpayments will enable you to save more money in the long term than if you were putting your extra money into a low interest savings account. And having more equity in your property puts you in a better position, if and when you want to remortgage and find a better deal.
Use our mortgage overpayment calculator to see how much you could save.
If you decide to make overpayments, it is advised that you time your additional payments according to when you are charged interest on your mortgage (daily, monthly, quarterly, or annually).
If your interest is calculated on a daily basis, the overpayments can be made at any time. If your interest is calculated either monthly, quarterly or annually, find out exactly when it is charged so that you can time your overpayments to be made a day or 2 before.
If the interest on your savings is higher than your mortgage interest rate
If this is the case, then making a mortgage overpayment is not advised and it is better to keep your money in the savings account. In the current climate, however, this is unlikely because savings account interest rates are generally low.
If your mortgage lender doesn't allow overpayments
There could be a specific clause on your mortgage that means you will be penalised if you pay more than your usual monthly repayment amount. It is therefore vital that you check with your lender before you overpay your mortgage. If the penalty amount is more that the amount you could save by putting the cash in a savings account, then making an overpayment is not cost effective.
When you have other higher cost debts
If you have other debts that cost more than your mortgage, then it is usually advised that you use your spare money to rather pay those debts off first before considering making mortgage overpayments.
When you might need money for other unexpected costs
It is a good idea to have some spare money put aside in a savings account to cover unexpected costs life might throw at you such as medical costs, home repairs, car maintenance etc. If you put all your spare money into your mortgage, you won't have access to it unless of course you have a flexible mortgage that allows you to borrow back money should you need it.
The basic rule is; if you get a higher rate on your savings than you pay on your mortgage repayments then you should keep your money in the savings account. And if your mortgage rate is higher than your savings rate, then it is better to overpay on your mortgage. However, it isn’t quite that simple and if you have quite a large amount of savings or spare cash then it can get rather complicated. We suggest you seek advice about your specific financial situation. Speak to one of our advisers now to assess whether making overpayments is indeed the best thing for you to do. For large sums of money an offset mortgage may be the most suitable.
Whist making an overpayment on your mortgage might sound like an obvious thing to do, should you find yourself with extra money to spare, it isn't usually as straightforward as that and you will need to carefully look into whether you will make more money by making overpayments or by saving the money. Use our mortgage overpayment calculator now and also speak with one our advisors for guidance.
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