As a homeowner, you may wonder if you should put extra cash towards your mortgage or invest it. Each option has financial benefits and potential downsides. Assessing these factors can guide you in making a decision that fits your financial objectives and risk tolerance.
The benefits and implications of mortgage overpayments
Benefits
- Interest savings: Extra mortgage payments reduce the property’s principal loan amount and interest paid over time. For instance, overpaying £200 monthly on a £250,000 mortgage at 5% could save about £44,427 and cut the term by six years.
- Improved loan to value (LTV) Ratio: Reducing your mortgage balance lowers your LTV ratio which can help secure better refinancing rates and protect against future interest rate increases.
- Financial freedom: Paying off your mortgage sooner reduces debt and financial stress, freeing up more income, especially beneficial as you near retirement or aim to lower your monthly expenses.
Implications
- Profit opportunity: Money used for overpayments on your mortgage might yield higher returns if invested, particularly given the current high mortgage interest rates.
- Liquidity issues: Overpaid funds are tied up in your mortgage and can't be easily accessed for emergencies or other investments.
- Penalties: Some mortgage conditions have early repayment fees or limits on overpayment amounts, so check your terms to avoid extra costs.
