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Overpaying on your mortgage is just what it sounds like: you give the lender more than what they’re asking for each month. Do that for long enough, and you’ll make some big overall savings as well as paying off your mortgage early. What a dream!
But before you throw all your savings at your mortgage provider, remember that there are downsides that can make overpaying look less rosy.
Not sure if overpaying is the right decision? Let’s take a look at the details.
Why bother overpaying your mortgage?
There are two main reasons why people make overpayments on their mortgage, and they’re pretty compelling.
Firstly, you’ll pay off your debt faster. By paying extra money to your lender every month, you could end up knocking years off your original term. It could make a huge difference to your financial health if your mortgage is completely paid off five years earlier than you originally expected, as you’ll no longer be sending a large portion of your income to your lender.
Because of this, you could also potentially save thousands of pounds. Remember, you pay interest to your lender on top of the money you actually borrowed to buy the property. By paying your mortgage off early, you’re also reduce the amount of time you spend paying interest. So the five years we mentioned above is also fives years’ worth of interest you won’t be paying!
What are the downsides?
On the surface, overpaying sounds like a great idea. But remember, lenders are relying on you paying interest to them for a certain number of years, and paying your mortgage off early means less profit for them.
That’s why you may face fees for overpaying. These fees, when they exist, are usually 1-5% of the amount you’re overpaying. So let’s say you decide to overpay by giving a lump sum of £2,000 to the lender. If your lender has a 2% penalty fee for overpayments, you’ll need to stump up another £40.
It often means making a bigger saving in the long run, but make sure you check those fees to make sure it’s worth it.
The good news is, lots of lenders will let you overpay a certain amount each year without without any penalty; in this case, you’ll only pay the fee if you overpay above this amount. The particular terms often depend on which type of mortgage you have, so always check the small print before making an overpayment.
Should I overpay on my mortgage?
Once you know about any penalty fees you might have to pay, there are a few more things to take into consideration.
If you could get more interest from your money by putting it in a savings account than you would save by overpaying, keep it in your pocket. (With interest rates so low, though, it’s pretty unlikely.)
If you overpay, will you still have enough savings for emergencies? While getting rid of your mortgage early is a good idea, you shouldn’t sacrifice for safety net – you never know when you’re going to need extra cash.
If you have more expensive debts, pay those off first. We’re talking credit cards and other loans with a high interest rate. Ignoring those debts can harm your financial situation and your credit score, both of which you want to keep healthy.
In short, think of mortgage overpayments as ‘nice to do’ rather than ‘completely essential’.
How can I overpay?
There are two ways to make an overpayment on your mortgage, and they’re both pretty simple.
You make regular overpayments. This might suit you if you’ve have a pay rise and your monthly income has gone up. By committing to paying an extra, say, £150 each month you’ll clear your mortgage debt faster.
You could also make a lump sum overpayment. Let’s say you come into some money, or you’ve built up a lot of extra cash in your savings account and you decide you could spare some. You could use it to make a one-off overpayment of a few thousand pounds.
Or you could also do both; it’s up to you.
If you haven’t chosen a mortgage yet, or you’re thinking of remortgaging, consider how much you would like to be able to overpay. It could make a difference to the mortgage deal you choose. If in doubt, talk to your mortgage broker.
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