Should I Overpay my Mortgage?
Whilst many people may be struggling to keep up payments on their mortgages in the wake of steep interest rate rises, there are a significant number of homeowners who may be wondering whether it is worthwhile paying more than the minimum statutory repayments each month, with the aim of helping to save money in the long run.
We look at some of the pros and cons of making a mortgage overpayment each month to see whether the average homeowner could be better or worse off by making an additional payment each month.
Here’s a simplified example to show how it could work
If someone had a £150,000 mortgage, with a term of 20 years at a rate of 5%, they’d be required to pay back a total of £237,584 in total when making the contracted standard repayment each month.
However, if they made an extra monthly overpayment of £100 on top of the existing payment, the cost of repaying the mortgage would fall to £223,327 – saving them approximately £14,300 and enabling the homeowner to pay back the mortgage nearly 3 years quicker.
Naturally there are more complexities in real life, and fluctuating rates each time you remortgage, but generally it goes to show that in many cases it may be possible to pay off a mortgage faster and reduce the amount of interest paid by making relatively small extra overpayments each month.
Making a mortgage overpayment
We’re all different, with different circumstances, so it’s wise to seek professional advice and guidance before deciding to arrange a mortgage overpayment. Your existing mortgage lender is likely to have some advice on their website, but we’d also advise that you talk to us too. We’ll be able to look at your precise circumstances and help give an illustration of what you can achieve by making an overpayment that suits your own lifestyle needs.
How much can you overpay?
The amount can be whatever you can manage, whether a small amount, right up to a general maximum of around 10% of the remaining balance each year1. Overpayments above this maximum amount can be liable for early repayment charges from your lender, so it’s wise to consider this before setting a precise amount. We can help you find the optimum amount that you’d like to repay each month by working with you – simply contact us to arrange an appointment accordingly.
When deciding how much to overpay, it’s important to consider the level of disposable income that you need to enjoy your current lifestyle, and especially any forthcoming expenditures – for example, having money set aside for any family holidays, activities, vehicle maintenance bills or household issues, for example.
What are the benefits of overpaying your mortgage?
Aside from reducing your mortgage debt more quickly, and potentially saving money on the amount of interest owed, there are additional benefits that can be seen from overpaying your mortgage.
If your mortgage rate is higher than your savings rate, you may find that it is more beneficial to pay back the mortgage and reduce the interest owed, compared to the amount of interest that your money may make while it is sitting in a bank account.
If you pay more of your mortgage off sooner, this can sometimes put you in a stronger position for a cheaper mortgage deal when your existing one is due for renewal. This is because you will have more equity in your property, and your loan-to-value (LTV) is decreased, which often opens up more choices when it comes to available rates for mortgages.
What are the drawbacks of overpaying?
If you have other debts which have higher interest rates, such as credit cards or additional loans, then it may be more beneficial to pay these off first. It’s worth considering any other costs you are likely to incur, and factoring these into whether you can afford to make a mortgage overpayment each month.
With interest rates rising, it’s also worthwhile doing your homework to see what your money could earn you if it’s saved in a high-interest account – there are chances that in some cases it may be more beneficial to save your money rather than pay additional amounts on your mortgage.
It’s important to think carefully about the amounts of money that you may wish to utilise on either overpaying or saving before going further, before looking at the various options available to you. It could be worth seeking financial advice for this element before making a decision.
As mortgage advisers, we are able to assist you in the area of what your mortgage circumstances may look like if you were to consider an overpayment, the impact that this could make on your mortgage and assistance in how you go about facilitating this.
Sources
MoneySavingExpert (2023) Ultimate Mortgage Calculator. Available at: https://www.moneysavingexpert.com/mortgages/mortgage-overpayment-calculator/ (Accessed 25 Sep 2023)
Your home may be repossessed if you do not keep up repayments on your mortgage.
All the information in this article is correct as of the publish date 28th September 2023. The opinions expressed in this publication are those of the authors. The information provided in this article, including text, graphics and images does not, and is not intended to, substitute advice; instead, all information, content and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information.
