After paying your mortgage for a while, you’ll have gotten used to your new outgoings and may find that you have a bit more disposable cash than you first thought. If you’re unsure on whether to spend or save, you may want to consider overpaying on your mortgage. Not only can this help pay off your mortgage debt faster, it can also save you money in the long run.
To help you make an informed financial decision, let’s take a look at all the various options for overpaying your mortgage - particularly if you’re looking to remortgage or buy a second home later in life.
What does overpaying entail?
Overpaying on your mortgage involves making additional payments beyond the amount you pay each month as standard. This surplus payment goes directly towards reducing the principal amount of the loan, rather than merely covering the interest.
What are the benefits of overpaying?
By overpaying your mortgage you could potentially pay less interest. When you allocate extra funds towards the capital, you effectively reduce the balance on which interest is calculated. Over time, this can translate into substantial savings, and could shorten your overall mortgage term.
Making overpayments allows you to speed up the repayment of your mortgage overall. Even modest additional payments can contribute to a shortened loan term, putting you on the fast track to owning your home outright. This accelerated payoff not only brings financial peace of mind but can also free up your budget for other financial goals.
By paying as little as £100 extra a month, you could significantly reduce the term of your mortgage. For example, if your mortgage was £100,000 over 25 years with an interest rate of 4%, and you decided to pay off an extra £100 a month, you could reduce your mortgage term by 6 years and save £15,510 on interest.
(This example calculation has been estimated through Money Saving Expert’s overpayment calculator. Important: you can typically only overpay 10% of your mortgage amount.)
It should be noted that some lenders may charge an early repayment fee, so it’s worth sitting down with your mortgage adviser before making any decisions to see if overpaying would be beneficial.
Should I overpay or reduce my mortgage term?
Whether you choose to overpay your mortgage or reduce your mortgage term, you’ll probably be seeking to pay more money off your mortgage each month. This means that in the long term, your interest rate stays low, and you’ll pay off your mortgage sooner.
Due to the flexible nature of making overpayments, overpaying affords you flexibility if your financial situation changes. Reducing your term formally changes your mortgage, meaning you’re fixed into a contract with higher monthly repayments over a shorter period of time. It’s important to weigh up the pros and cons of each carefully before you make a decision, as everyone’s financial circumstances are different.
Speak to your lender
If you’re considering making an overpayment on your mortgage, the best thing to do is speak directly with your lender. You can make changes to your overpayments at any time, whether this is to reduce or increase them.
Whether you need to allocate extra funds for a special occasion (such as a wedding) or have had an increase in salary and want to invest in your mortgage, having the flexibility to modify your monthly repayments helps ensure that you’re making your mortgage work for you.
For instance, if you get engaged and suddenly need that extra cash to save for a wedding, you can reduce your overpayments or revert to your original monthly payments. Similarly, if you get a promotion at work, you might decide to invest some more money in your mortgage by upping the amount you overpay. Whatever your change in circumstances may be, your lender will be able to help ensure that your mortgage overpayments work for you.
Get expert mortgage advice
If you do decide to overpay on your mortgage, remember you don’t have to overpay a lump sum - small and consistent overpayments can lead to a quicker reduction in the overall loan term. However, it's crucial to be aware of any early repayment penalties imposed by lenders. If you’re thinking about overpaying your mortgage, make sure to talk things through with a mortgage adviser and lender before you commit.
Our team of expert advisers are here to help you through every stage of your mortgage journey, so make sure to get in touch with us.
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.
You may have to pay an early repayment charge to your existing lender if you remortgage.
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