Have you managed to save more than usual during lockdown? Or perhaps one of your children has moved out of home and you now have some excess income that you’re not sure how to best put to use?
If you have some surplus cash that you don’t need for maintaining your current lifestyle, you could consider overpaying on your mortgage.
Of course, there are advantages and disadvantages of increasing your mortgage repayments, which can depend on everything from the mortgage deal you have to your personal circumstances.
Here’s what you should consider before overpaying on your mortgage.
Calculate how much you can save by overpaying
With interest rates as low as they are, it could make sense to reduce what you owe on your mortgage, rather than leaving your cash sitting in savings.
Your first step should be to go online and use an overpayment calculator to see how much you could potentially save.
There are plenty of free calculators available that you can use to do this. A couple of informative and interactive calculators can be found on MoneySavingExpert
, both of which show you exactly what you could save by overpaying.
For example, this calculation from Nationwide shows how much you could save if you made a lump sum payment of £10,000 on the remaining £100,000 of a mortgage, with 10 years left on the term and an interest rate of 2.5%.
In this example, you could save £2,671.08 in interest and shave one year and one month off your term.
Alternatively, you could choose to make regular payments if you don’t have a lump sum to hand.
The example below calculates the impact of monthly overpayments of £250 on the same mortgage of £100,000 left to pay over 10 years.
This could save you £3,103.35 in interest and reduce your term by two years and three months.
If you have the money to hand to do it, overpaying on your mortgage could reduce your term and save you money in the long run.
Consider paying off other debts first
You may be better off clearing any other debts you have instead of making larger mortgage repayments.
It can make sense to pay off any high-interest loans first, such as credit cards or payday loans, before you consider overpaying your mortgage. The average interest on a credit card is 19%
, which is likely to be costing you more than the interest on your mortgage if you’re holding onto this kind of debt.
It may be worth putting the money towards any medium-term loans you have, too. For example, you may be better suited paying off a loan on a car entirely than reducing your mortgage term by a small amount.
Make sure you top up your emergency fund
Before you make payments towards your mortgage or any other loans, make sure you have a sufficient emergency fund.
There’s no exact science for how much should be in your emergency fund, but a good rule of thumb is to keep roughly three to six months’ salary. The amount you have should be enough to cover bills and any other financial obligations you have in case of a large, unexpected expenditure, or if you’re suddenly unable to work.
Your emergency fund should be kept in an easily accessible place, such as a savings account, and shouldn’t be used unless you really need it.
Check that your mortgage deal doesn’t have early repayment charges
If you’ve paid off high-interest debts and have a sufficient emergency fund, and you still have cash left over, then overpaying on your mortgage may be a good option for you.
However, one important to thing to check first is whether your mortgage deal has early repayment charges (ERCs).
Lenders often apply ERCs to fixed-, tracker- and discounted variable-rate deals to recoup any lost interest if you try to pay off your loan before the end of the term.
Typically, if your deal does have ERCs, you can still overpay by 10% of the remaining loan per year without incurring charges.
After this 10% threshold, your lender may apply ERCs to any overpayments you make. Charges can be up to 5% of the amount you overpay, which could defeat the point of overpaying in the first place.
These rules vary across lenders so check with yours to see if you’ll be subject to any charges.
Get in touch
If you’d like help deciding whether overpaying on your mortgage is a good option for you, please do get in touch. At NM Money, our experts will be able to help you work out what you can afford to do and advise you on whether overpaying is the right choice in your circumstances.
Request a callback
or call us on 03300 583 859
for more information.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.