If you’ve found yourself with some extra cash, whether it’s a lump sum or a bit extra in your budget every month, you may have some questions about what to do with it.
By overpaying on your mortgage, you could save money in the long run, and even help pay off your mortgage faster.
Let’s dive into what’s involved, whether it’s going to work for you, and how to go about overpaying your mortgage.
The benefits of overpaying your mortgage
The benefits associated with mortgage payments can be significant and could unlock a range of advantages that will shape your mortgage journey going forward. Here are some of the most prominent benefits:
1. Pay less interest
When you make overpayments on your mortgage, you’re contributing more to paying off the principal amount of your mortgage, rather than focusing on the interest. By doing so, you could effectively decrease the total interest you’ll pay over the life of your mortgage.
2. Build equity
On top of paying less interest over the term of your mortgage, you are also taking steps to building more equity in your home. Equity represents the paid-off portion of your home, or the amount you own outright.
3. Shorten the length of your mortgage
By making regular overpayments, you could reduce the length of your mortgage term, though it’s important to note that making too many (or overpayments that are too large) could force you into an early exit situation, which may come with fees.
It’s always worth sitting down with your mortgage adviser to see if the benefits of overpayment outweigh the potential charges.
Is it better to overpay or reduce your term?
If you’re thinking that you could simplify this entire process by shortening your mortgage term, which would inherently increase your payments, then you’d be correct. However, shortening your term may not suit your circumstances. Here’s why.
Why overpaying your mortgage may suit you better
Overpaying on your mortgage rather than shortening your term gives you financial flexibility. If your circumstances change - for example, you need to save for a significant life event, or you change from a dual income household to a single income - you can simply reduce your overpayments. If you opted to shorten your term, you’re locked into the higher monthly payments, which may no longer be sustainable for your financial situation.
Opting for overpayments can give you more control and adaptability as life unfolds.
Can you make bulk overpayments on your mortgage?
The rules regarding overpayments can vary depending on your specific mortgage type and lender. While some lenders may allow unlimited overpayments, others set limits on what you can overpay. Exceeding this limit could result in additional fees, as you’re essentially ‘leaving’ your mortgage, and could be subject to an early repayment charge.
Some products, like tracker or SVR mortgages, may have no limits but fixed-rate deals often do. It’s important that you always sit down with your adviser or lender and carefully review the terms and conditions of your mortgage to ensure you’re aware of any limitations you may encounter. This is one factor that will determine whether you choose to make larger overpayments or monthly contributions.
Lump sum vs. monthly
Both approaches to overpayment can result in mortgage savings, but it is important to note that each has its own advantages and disadvantages. Regular monthly overpayments offer flexibility, as we’ve mentioned, making it easier to factor into a monthly but changing budget.
Paying a lump sum can yield significant savings and expedite clearing mortgage debt. However, unless you have a secondary lump sum of savings, you are potentially putting yourself at risk should the worst happen and you can no longer work, whether that’s from health reasons or job loss.
Income protection insurance could help to ease some of the stress associated with job loss.
Making a choice that suits you
It’s always important to consider your personal circumstances and financial goals when deciding if overpaying on your mortgage is the right choice for you. You’re not obligated to make overpayments, so if you’ve come to the end of this article and feel like it doesn’t work for you, that’s absolutely fine!
As long as you’re making your agreed monthly repayments, you have plenty of options available to you.
If you are considering making overpayments on your mortgage, but don’t know where to start, get in touch with a mortgage adviser who can help you weigh the pros and cons in light of your specific circumstances.
One of our friendly mortgage advisers would be more than happy to talk through it with you and help you make an informed decision that aligns with your long-term financial wellbeing.
Important information
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend on your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
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