Important information about mortgage overpayments.
Overpaying on your mortgage can reduce the term of your mortgage and the total amount of interest you will pay over the term of your mortgage. Very few homeowners currently make these overpayments despite the potentially huge interest saving they could achieve.
In this blog, The Mortgage Girl explains what overpaying on your mortgage could mean for you, and provide advice on the key things that should be considered.
Only 7% of UK homeowners have overpaid their mortgage in the past six months. (according to life insurance broker LifeSearch)
So should you overpay on your mortgage?
If you have bought your home, you will know, you worked so hard to save for the deposit, and to manage your monthly outgoings including the set monthly mortgage repayment. You had great intentions when you bought the property, to overpay on your mortgage as and when you can. For example, you may have told yourself, ‘When I get that Christmas bonus, I will pay a chunk off my mortgage’.
Most people don’t.
Life gets in the way and there is always something else to consider.
However, what if you realised the effect that making these overpayments could have on your mortgage. What if we told you, you could potentially save thousands in interest payments by overpaying on your mortgage! Your future self will certainly thank you for it.
So how much can you save by overpaying?
The amount you’d save by overpaying depends on the size of your mortgage and how much extra you pay.
The below table created by Which illustrates how much you could theoretically save should you overpay on your mortgage by a set amount each month. The figures have been calculated based on a £200,000 mortgage with a 25-year term and interest rate of 2.5%.
Will I not incur a charge if I overpay on my mortgage?
The above examples are based on making set overpayments every month. It is important to consider what your lender’s overpayment allowance is before making any overpayments.
Most mortgage lenders allow you to make ad-hoc overpayments monthly or as a lump sum or several lump sums. For example, if you wished to overpay around £100 one month, £50 the next, and nothing the month after, you can do so.
With most lenders, there is usually a minimum overpayment amount of £50 required.
You can make overpayments by logging in to your online mortgage account with some lenders, others may require you to call each time you wish to make an overpayment.
Most mortgage deals will allow an overpayment of up to 10% of the balance of the mortgage per year, with no repayment penalty, but please contact your lender to check their policy before making additional payments.
A 10% overpayment limit means that on a £200,000 mortgage, you’ll be able to overpay by £20,000 each year.
If, for example, you received that lovely Christmas bonus of £500, and you chose to use this to overpay on your mortgage, that £500 lump sum overpayment would count towards your £20,000 (10%) overpayment allowance, using the above mortgage example.
What if I want to pay more than the permitted overpayment allowance?
You will likely incur an Early Repayment Charge (ERC) if you pay more than the permitted 10% overpayment allowance whilst you are tied into a deal with your mortgage lender.
This should be considered very carefully. If you are looking to make a large overpayment, or perhaps repay your mortgage early, The Mortgage Girl recommends you obtain Mortgage Advice from a qualified Mortgage Broker as there are ways that this can be done without incurring a costly ERC.
Shouldn’t I keep my money in a savings account instead?
It is very important to make sure that you have got funds set aside as an emergency fund in an accessible savings account before even considering making overpayments.
As a general guide, The Mortgage Girl recommends keeping enough money in an easy-access account to cover three months of committed outgoings, such as your mortgage payment, bills and committed repayments.
However, in terms of financial gains, poor returns on savings are one of the main reasons homeowners consider overpaying their mortgages.
Before deciding on whether to overpay on your mortgage, consider a full overview of your finances. If you have outstanding debts such as personal loans or credit cards, it is likely that prioritising paying these off would be more cost-efficient, as the interest charged on this debt is likely to cost you more than the amount you’ll save by overpaying your mortgage.
Any other tips for saving on my mortgage?
An alternative to overpaying your mortgage is Remortgaging to a better deal.
Now is a great time to remortgage, with low-interest rates available across the whole of the market.
If you are due to come to the end of your introductory rate period or fixed-term, don’t delay the remortgage process. If you are in a fixed period deal, these mortgages come with high early repayment charges if you leave your deal before the mortgage deal end date. The Mortgage Girl will review your entire mortgage, including early repayment charges (ERC) to see if a better deal can be found, even by remortgaging early and including the ERC.
For example, My client is three years into a five-year deal, their mortgage balance is £100,000 and they have a £2,000 ERC to leave the deal early. They are currently on a 3.5% interest rate. The Mortgage Girl has recommended a 2% interest rate deal with a new lender and upon a comparison of all costs, including paying the ERC and considering the remortgaging fees, the substantial savings mean it is worth this client remortgaging now to obtain this interest rate.
At The Mortgage Girl, we will provide you with the full calculation comparison between switching to a new lender, or staying where you are. We will always recommend the best option for YOU.
If it does not make sense to remortgage now, but you have some extra funds in the meantime, you could consider overpaying until the deal comes to an end. This will give you an even better chance of switching to a great deal when no early repayment charges apply. The best deals are available to people borrowing lower proportions of the property’s value (We call this the Loan to Value).
When speaking to clients about remortgaging we will always discuss your mortgage term and your future aims.
If your goal is to pay off your mortgage more quickly, it is important that we review your budget, to increase monthly repayments which reduces your mortgage term.
So should you overpay on your mortgage? The answer is, get in touch and we would be happy to help you decide if it is the right option for you.
Lots to consider and The Mortgage Girl is here to help. Please get in touch for a free mortgage review.
Check out our page all about remortgaging which can be found here
If you liked this post Stamp Duty Has Been Extended and looking for more great mortgage tips, news & advice, check out our last blog post Are long term fixed rates the future?
Call 01752 749655 or CONTACT US for free impartial mortgage advice to help you find the best deal.