Is Overpaying Your Mortgage a Good Idea?
Interest rates have been high since the disastrous mini-budget last year, which has had a knock-on effect for mortgages and, for some, added more than hundreds of pounds to their repayments. Even before interest rates were high, there were various schools of thought about mortgage payments and whether it’s worth your while to overpay.
The bottom line is, if you can afford to overpay your mortgage, it can be in your benefit to do so. By exactly how much will depend on the affordability and by how long you wish to reduce the length of your mortgage. The other school of thought is whether to save these extra payments instead in order to capitalise on better interest rates. It depends on your circumstances. A rough breakdown of overpayments and savings can be seen in the table below. These figures are based on a £150,000 mortgage at 4% interest over 25 years.
Reduction in Mortgage Term
Interest Saved in Overpayments
Interest Saved in Savings at 3%
2 years, 5 months
4 years, 4 months
7 years, 5 months
12 years, 8 months
16 years, 9 months
Usually, if you overpay your mortgage, you can end up in a better position than if you put this money into savings. Overpayments provide you with the means of being mortgage free more quickly and can often be without any interest, potentially shaving years off your mortgage length. Providing the mortgage rate is higher than the savings rate, it should be more beneficial. It’s also dependent on whether you wish to overpay every now and again or simply up your monthly repayments.
If you’re thinking about overpaying, it’s important to ensure you’re in the best possible position to do so. If you have other debts, such as from a loan or credit card, these should be cleared first. The most expensive debts should always be cleared before any others as this will bring in savings on the interest applied.
Secondly, it’s always useful to check to see if you can overpay your mortgage without penalty. Most mortgage lenders will allow you to overpay by 10% a year without charging you any fees for doing so. Going above this threshold can land you with a fee of 1-5% on the amount, which is why it’s important to check. Standard Variable Rate mortgages can be more expensive anyway, so a remortgage could be on the cards instead of overpayments.
Finally, it’s worth thinking about whether these overpayments will leave you without any savings. In case of an emergency, such as an impromptu trip to the car garage, burst water pipe or leaking roof, it’s useful to have some cash set aside. When you overpay, you won’t have any of this spare money lying around. If you need money fast, this could put you in debt again, causing you to take out another loan.
After you’ve cleared overpayments with your lender, you might be asked if you want to reduce the following month’s amount or if you’d like to keep the payments as they are but reduce your mortgage term. The best scenario is always the latter. Whether you choose to start a standing order or add the mortgage account as a payee to your online banking system, you’re then free to overpay as you see fit.
Need a hand clearing debt before you can overpay? Plevin PPI claims could be a way to help your situation.