Overpaying your mortgage - is it worth it?
Want to pay your mortgage off faster? Mortgage overpayments could be for you
Mortgage overpayments are when you pay more than your normal monthly mortgage payment. This lets that you pay your mortgage off faster and you could pay less interest overall.
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Can I save by making overpayments?
By making over payments you could save on your overall mortgage.
As interest rates on savings are currently low, overpaying on your mortgage could mean you save more money than if you put that money into a savings account.
Depending on your rates and lender, it could be worth looking into overpayments rather than saving that bit of money as normal.
How do mortgage overpayments work?
It varies with each lender, but generally mortgage overpayments are done in regular payments or as a one-off sum.
You’ve got a mortgage for £200,000 for 25 years at a fixed interest rate of 4%. Your monthly repayments would be £1056.
What you’d pay at the end of your mortgage term is £316,702. That’s £116,702 in interest.
If you made over payments of £100 each month, your mortgage could end three years and five months sooner. That would cut off £17,069 in interest. This would bring the total interest down to £99,633.
It’s hard picturing the savings of £17,000 as it’s not money that would go into your bank in one go. The option of overpayments means you can free yourself up a bit earlier from your mortgage and enjoy that money in the future.
Or What’s the difference between saving and making an overpayment?
The general rule of thumb is, if your mortgage interest rate is higher than your savings interest rate, consider making the overpayment.
Here’s an example - we’ve chosen easy figures to make the difference clear:
If you’ve got a savings account with 1% interest and you saved £5,000, the annual interest earned on that would be £50.
At the same time say you’ve got a mortgage debt of £5,000 in with 3% interest, the extra you’d pay in interest on top of that debt would be £82.
In this case it could be worth considering the overpayment. The interest you’d get from savings would be less than the savings you’d make by not having to pay the interest on your mortgage.
But if you’ve got other debts, like credit cards, loans or overdrafts, it’s worth reviewing your finances before making a decision either way.
Am I allowed to make overpayments?
It depends on the lender. Your mortgage offer should detail how and if you can make overpayments. You may find that lenders:
Have a limit of 10% you can pay on top
Could charge you an Early Repayment Charge (ERC), meaning you’d pay a small fee on top for making the payment
Allow you to make unlimited overpayments
Have a maximum amount you’re allowed to pay each month
May only allow for one lump sum overpayment
Is it the right option for me?
If you’re looking to pay off your mortgage faster, then making overpayments is a flexible way you can do this. You choose how much and how often you overpay, then can go back to your regular payments at any time, (obviously depending on the lender).
And if you’re able to commit to a regular overpayment, you could shorten the length of the mortgage itself.
Ultimately, it depends what your goal is. Before you take the plunge, do your research and speak to your mortgage provider.