Most lenders allow you to make mortgage overpayments. And this means you pay extra on top of your usual monthly payments.
With interest rates rising again and predictions of further increases, reducing your home loan may seem like a great idea. If you’re lucky enough to have spare savings, then it might be a good idea. But, as with most things in life, there are pros and cons when it comes to mortgage overpayments.
What are mortgage overpayments?
Making an overpayment or overpayments on your mortgage simply means paying more than your agreed monthly home-loan payments. Most lenders allow you to repay up to 10% of the outstanding balance per year, this can be via monthly of annual payments. For example, on a £120,000 mortgage the additional payments would be £12,000 per year, or £1,000.
Your mortgage overpayment can be:
- A one-off lump sum overpayment: Whether you receive some inheritance or get a bonus from work, you may want to use it for paying off some of your mortgage.
- Monthly overpayments: If a new job or situation changes mean you’ve a little extra in your account each month, you might want to pay more each month. We advise you do this via a Standing Order. The lender will have their own sort code and an account number and the reference is usually your mortgage account number. This way, you can keep control of payments. So, if you get an unexpected bill – for example if your needs major breakdown repairs – then you can change or cancel the payments.
- A combination: If you’re lucky enough to have a bit extra each month and some spare cash, you could use both options.
With all that in mind, you can use our free overpayment calculator for an overview of your overpayments. But bear in mind, it’s always best to speak to your adviser before making any decisions.
Pros and cons of overpayments
With most things in life, there are no ‘one size fits all’ solutions. Overpayments on your mortgage might be perfect for some people, but could be a bad decision for others.
If you’re unsure, it’s always worth chatting to your mortgage broker before making a decision. Here, we’ll take a quick look at the main issues.
- Pay off mortgage sooner: Making overpayments means you will be able to clear your mortgage sooner. That means your property will become yours much earlier than planned, and you won’t need to make those big monthly repayments. So, you’ll be able to use that cash elsewhere, such as on hobbies or home improvements.
- Better remortgage deals: If you have been overpaying, you’ll chip away at what is owed. As a result, you’ll have more equity and will need to borrow less when you need to remortgage. Having a lower ‘loan to value’ means you’re more likely to be offered lower interest rates and better mortgage deals.
- Better returns than savings accounts: Most savings rates are below inflation, so the money you save on mortgage interest generally beats the returns you get from putting cash in a savings account. It could be a better way of using your spare cash.
- Other debts mount up: Being mortgage free as soon as you can sounds great. But other debts, such as credit cards, could start to mount up if you are diverting funds to overpaying your mortgage. Credit cards and loans usually have a much higher interest rate compared to mortgages. It’s better to pay high interest credit sooner.
- When it’s gone, it’s gone: If you put cash into a savings account, you can dip into it when you want – depending on the access terms. For example, if your car needs some unexpected maintenance, using your savings is better than borrowing. But if you’ve spent your cash on overpaying mortgages, you can’t ask for any of it to be returned.
- Repayment charges: If you pay your mortgage more quickly, then most lenders will charge you for early repayment. Lenders tend to limit how much you can overpay each year. Typically, this is up to 10% of your loan. Get some advice to make sure that if you do overpay, it’s worth paying the early repayment charge.
What to do next
It’s always best to look at all the options available before making a decision. Speak to your mortgage broker or lender if you’re unsure. Being mortgage free is a great aspiration, but if it’s at a bigger cost in the long run, then you need to understand your options first. Contact our team today for the best advice.