Many homeowners are making overpayments on their mortgage due to the high interest rates we’re seeing and how much more this is costing. There’s no doubt it can be a prudent move – even saving you tens of thousands of pounds over the course of the mortgage term – however, deciding on whether to pay more than the necessary sum each month isn’t always straightforward and needs to be thought through carefully.
Benefits of overpaying your mortgage
Overpaying your mortgage can bring many benefits, including:
- You can become mortgage free sooner by reducing the balance of your loan.
- You can lower the total interest you pay on your mortgage.
- As you pay more off, the sum you are paying interest on decreases, lowering your mortgage payments overall.
- You reduce your loan-to-value (LTV), the more capital you repay. This could increase your equity and give you access to more competitive mortgage rates.
Considerations before overpaying
Before jumping in, it’s important to weigh up whether overpaying on your mortgage is right for you and your current financial circumstances.
First, establish whether you’ll incur early repayment charges (ERCs). Some deals stipulate you’ll be charged a fee for paying extra off your mortgage. Typically, this sits somewhere between 1% and 5% of the amount you’ve overpaid. Most lenders let you pay off a certain sum each year before charging you an ERC.
You should also consider if you’ll need the money for any other debt or bills.
Types of mortgages and overpayment rules
Check whether your mortgage has restrictions on overpayments. Some lenders will allow you to overpay however much you want; however, others will limit it to a percentage of what you owe – often up to 10% of the outstanding balance each year. Overpaying by more may mean an ERC.
If you’re paying your mortgage provider’s standard variable rate (SVR), you can often overpay as much as you like. SVRs are expensive though, so consider remortgaging for a better deal, like a fixed rate mortgage.
Impact on your financial flexibility
Being mortgage free is an appealing prospect. You might want to bring this forward to coincide with specific life events, such as retirement or paying towards university fees for your children, for example.
Planning for a secure financial future makes sense. The key is in the ‘planning’. It’s vital it’s not at the risk of causing yourself issues in the here and now; as such, we recommend that you seek professional financial advice.
