Should I Make Mortgage Overpayments? – Forbes

February 14, 2022 By admin

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When you take out a repayment (capital & interest) mortgage your lender will work out how much you need to pay back each and every month to ensure the mortgage is paid off at the end of the agreed term.
If you pay more than this amount, you’ll be making a ‘mortgage overpayment’.
Note that if you have an interest-only mortgage, you clear what you owe in one go at the end of the mortgage term.
Making mortgage overpayments means you’ll pay off your mortgage quicker and will save money on the total amount of interest you pay over the life of the mortgage.
But that doesn’t mean mortgage overpayments are right for everyone. First, not every mortgage deal allows overpayments, and some put a limit on how much you can overpay. Secondly, any spare cash you have might be put to better use elsewhere.
So here’s a run-down of mortgage overpayments so you can work out what’s right for you.
Trussle is a 5-star Trustpilot rated online mortgage adviser that can help you find the right mortgage – and do all the hard work with the lender to secure it. *Your home may be repossessed if you do not keep up repayments on your mortgage.
Mortgage overpayments mean paying more than your contractual monthly payment.
There are two ways you can make mortgage overpayments:
If you have some spare cash or receive an annual bonus, you might want to pay a lump sum off your mortgage.
For example, if you owe £200,000 on your mortgage and pay a lump sum of £50,000, you’ll then owe £150,000 on your mortgage.
When you make the overpayment, your lender may offer you two options:
It’s almost always best to keep your monthly payments the same and reduce your mortgage term. This will result in you clearing your mortgage debt ahead of schedule.
If you have surplus disposable income each month, you might want to overpay by increasing your regular mortgage payments.
For example, if your monthly mortgage payment is £500, you might want to pay £600 instead.
Doing so will mean you reduce the term of your mortgage – as well as paying it off quicker, this will mean you pay less interest overall.
Not all mortgages allow overpayments – so check your mortgage contract or talk to your lender before doing anything.
Whether you can overpay, and by how much, will depend on your mortgage product (not just your lender) as different mortgage products have different rules on overpayments.
Your mortgage may allow you to:
If you have a ‘flexible’ or ‘offset’ mortgage, you can normally make unlimited overpayments. Lifetime trackers also often allow unlimited overpayments.
If you’re paying your lender’s standard variable rate (SVR), you can usually overpay by as much as you want.
Your ability to make overpayments is likely to be more limited on a fixed rate mortgage. If you overpay by too much, early repayment charges (ERCs) may apply and wipe out a proportion of the savings you are trying to make.
You can save significant sums of money by overpaying your mortgage. Here are a few examples, with all figures rounded to the nearest pound.
Say you had a £200,000 repayment mortgage with 20 years left to go with an interest rate of 3%. Your normal monthly payment would be £1,109.
If you increased this by £100 to £1,209, you’d reduce the mortgage term to 17 years and 10 months, and so pay it off two years and two months quicker. You’d also reduce the total amount of interest you paid from £66,206 to £58,403, saving £7,803.
If you had the same mortgage and made a lump sum overpayment of £20,000 and kept your monthly payments the same, you’d reduce your mortgage term by two years and seven months.
You’d also reduce the total amount of interest you pay from £66,206 to £51,165, saving £15,041.
If you did both these things – made a £20,000 lump sum payment and overpaid by £100 a month – you’d reduce your term by four years and five months and save £20,797 in interest.
It’s usually best to phone your lender to discuss any overpayments you plan to make. This will enable you to check any limits or fees.
Lump sum overpayment can normally be made by bank transfer. If you have online banking, with some lenders you’ll be able to change your mortgage payment online.
You might also be able to set up your mortgage account as a payee on your online banking so you can make overpayments as and when you want.
As outlined above, making mortgage overpayments means you can pay off your mortgage quicker and pay less interest overall.
It will also increase the equity you own in your property. This means you’ll have a lower loan-to-value ratio (LTV) which will make you eligible for cheaper mortgage products if you want to remortgage.
With savings interest rates so low, most people will be paying more interest on their mortgage than they earn on their savings. This means it makes financial sense to overpay.
Not all mortgage products allow overpayments – so check your contract before you start making extra payments. If you are on a fixed rate mortgage with early repayment charges, making a large overpayment could trigger these charges to be levied.
You should only overpay on your mortgage if you have enough spare money to do so. Before you overpay, make sure you can still afford your monthly expenses and that you have enough cash for any emergencies.
Mortgages have lower interest rates than many other types of debt such as credit cards and loans. So, if you have spare money, you should pay off your most expensive debts first.
When you overpay your mortgage, you may want the flexibility of borrowing your money back or making underpayments in the future.
If your mortgage is fully flexible or an offset mortgage, you should be able to borrow back the amount you have overpaid, or perhaps make underpayments within certain limits.
But with most other mortgage products, getting back any money you’ve overpaid might not be permitted. So, bear this in mind before making overpayments.
Trussle is a 5-star Trustpilot rated online mortgage adviser that can help you find the right mortgage – and do all the hard work with the lender to secure it. *Your home may be repossessed if you do not keep up repayments on your mortgage.
Forbes Advisor UK’s broadband and mobiles expert, Emma Lunn has reported prolifically on the subjects for more than 16 years. Her award-winning work features in national newspapers, right through to specialist websites and trade titles.

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