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Should I overpay my mortgage?
If you’ve got a mortgage and you’ve got the spare funds to do so, overpaying could be a good way to help you save on interest in the long run. Not only this, but overpaying may mean you’ll be mortgage-free much faster than if you didn’t.
However, it’s important to be check for any early repayment charges (ERCs). Some lenders will charge you for overpaying your mortgage, which can sometimes cost more than what you would save by overpaying.
Save on interest and get mortgage-free faster
If you’ve got a bit of extra disposable income each month that goes into a savings account, putting the money towards overpaying your mortgage might be a better way to save. This is because the interest rates offered by banks on your savings are often much lower than the interest you have to pay for borrowing. It’s worth double-checking that your savings account isn’t paying more than you are forking out in interest for your mortgage, though.
Even if you don’t think you’d be able to afford overpaying by very much, making a relatively small overpayment each month can reduce what you pay in interest over the duration of your mortgage. For example, on a regular 25-year repayment mortgage of £80,000 at 3.5%, overpaying by just £50 each month could save you over £7,000 in interest and shorten your term by four years and one month.
There are two ways of overpaying. Either you can ask your lender to increase your repayment by an agreed amount each month – perhaps £50, for example. This is a voluntary overpayment so if your circumstances change (or you change your mind) you can always resume your regular repayments. Alternatively if you come into a windfall or have a lump sum you could make a one off payment to reduce your mortgage balance.
Money Saving Expert offer a free overpayment calculator that you can use to work out how much you could save, and how long you might shave off the length of your mortgage by overpaying. Although, it’s worth bearing in mind that it doesn’t include any ERCs that you may face.
Weighing up any early repayment charges
Before you start overpaying, you should check your lender’s terms for any ERCs. Some lenders allow you to make yearly overpayments of no more than 10% of your outstanding mortgage balance without incurring charges, but this is not always the case. Ultimately, the decision rests in your lender’s hands, and what’s true for one mortgage deal may not be for all.
It may be more likely you’ll be hit with an ERC if you’re on a tracker, discount or special offer fixed mortgage – unless your mortgage is specifically sold as being “flexible”.
In some instances, you might face a tiered charging system by which the amount you have to pay decreases year by year with your outstanding mortgage balance. But, in others you may find that your lender consistently charges a set amount, or a set percentage of the entire amount you borrowed.
Should you find that your lender does in fact charge a fee for repaying your mortgage early, what you save in interest might not be worth the charge. That’s why it’s vital that you find out how much you would have to pay in charges before you overpay, especially if you’re making a lump sum overpayment.
Remember to keep a savings pot
It’s all well and good using your extra cash to put towards repaying your mortgage earlier, especially if there are no penalties for repaying early. But, if you don’t have much set aside in savings, it’s probably a good idea to build yourself a pot of emergency funds first.
Having a few months’ worth of cash that could cover all your bills and outgoings set aside can be a saving grace if anything should go wrong and your financial situation changes.