There are several benefits to overpaying your mortgage but there are circumstances when it makes sense to keep to your agreed repayments as set out by your mortgage lender.
A mortgage overpayment is paying a larger amount to your mortgage lender, this can be a one-off lump sum or upping your monthly payment so that you pay the additional amount every month. The benefits to doing this are that you pay your mortgage off quicker, because overpayments pay off the mortgage directly (not any interest you owe), you can shorten the amount of time it takes to repay the mortgage and you can lower the amount of interest you pay in total.
Your normal mortgage repayment (on a repayment mortgage) pays off part interest and part of the mortgage on the property and because more interest is due at the start of your mortgage the monthly repayment is split towards paying off more interest rather than the mortgage itself. When the amount remaining on the mortgage starts to go down, the amount of interest on each payment decreases and you’ll be paying of a larger amount of the property.
If you show a lender that you are able to make overpayments, some lenders will allow you to underpay further down should the need arise, but not all lenders do, so it’s best to check first.
Overpaying your mortgage can seem like a great idea, but there are times when we wouldn’t recommend it.
*If you have credit commitments that are on a higher rate of interest, it may be best to pay these off first.
*Not all lenders will allow you to make overpayments, some won’t as this means they lose revenue from the interest that you would pay.
*Some lenders will charge you a fee for making overpayments so you should check if this would negate any benefit to making these additional payments.
*If you are on a fixed rate mortgage, most high-street lenders will cap your yearly overpayments to 10% of the total loan remaining. Once your deal ends and your mortgage switches to a standard variable rate, there normally are no restrictions, but best to check with your lender.
It makes sense to have savings to fall back on, so it would be advisable to have these in place before you start making overpayments on your mortgage.
Think about your retirement, would be more beneficial to invest your money into a pension plan rather than reducing your mortgage?
Most lenders will calculate interest on a daily basis so as soon as you pay your overpayment, you will reap the rewards. However, some lenders calculate on monthly, quarterly or annually, so it’s wise to time your overpayments to get the best saving.
Please note the content of this blog is for guidance purposes only and does not constitute for professional advice. Contact us today at email@example.com or by calling 01473 216950.