At go2mortgages, we get asked about overpaying your mortgage A LOT. And the truth is, like many things (!), the answer is different for everyone. Your financial situation is unique to you and you alone. As qualified mortgage brokers, we are able to advise on the current offerings and climate, and, if you have no expensive debts and an emergency fund in play, then overpayments are well worth considering.
Online mortgage overpayment calculators can clearly demonstrate the impact that additional payments could have on the length of your loan and the total amount of interest you are charged. And, you don’t need to commit to making regular overpayments – it is normally possible to overpay whenever you want, provided you stay within any annual limits.
In general, lenders offer an overpayment facility which is usually capped at 10% of the outstanding loan amount. So for example, this means on a £100k mortgage, you can overpay up to £10k in one year without being penalised. You can find out your remaining overpayment allowance for the year using online forms or by contacting your lender so that they can post the information to you. Here is an example of Halifax's 'request for confirmation of overpayments allowance' for your reference.
Pros and cons of overpaying on your mortgage:
- More equity in your home means a bigger asset
- Reduces the amount of interest you are paying back to the lender
- You'll pay your mortgage off quicker
- The Loan to Value (LTV) rate falls faster which means access to lower rates should you go to remortgage
(Read our guide on what LTV is here)
- If you put your money into your property, it means these funds won't be available for any unexpected financial needs
- Overpaying by too much could mean Early Repayment Charges (ERC)
- Other debts (such as credit cards) tend to have higher interest rates than mortgages, so it may be more beneficial to clear those debts first
- Investing your money elsewhere could lead to a better long-term return
Chris Torney from Natwest notes that, "it can make sense to prioritise the likes of pension pots or long-term investments. Although stockmarket-linked investments carry higher levels of risk, they may also offer higher potential returns than might be realised through reducing your mortgage term and interest levels".
With savings rates near rock bottom at the moment, overpaying on your mortgage can seem like a no-brainer, as it's an easy way to save money on interest repayments. It is not the sexiest or the most thrilling way to make money and it is not right for everyone. But, if you would like to speak to one our mortgage advisors about your situation, please reach out today.
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