Still wondering when to overpay? If you’re overpaying your mortgage, you don’t just get the advantage of paying interest on a smaller amount of debt. Overpaying also means your loan to value ratio falls faster. And if your LTV falls, it means when it comes to remortgaging, you may be able to get a cheaper deal than if you hadn’t overpaid. Financial situations can change considerably in a short time frame. You may have received a substantial inheritance sum, got a new job with a higher wage, or secured a pay rise resulting in increased disposable income. A recent article published in the Guardian outlines how the present economic climate offers little incentive to save, as savings rates could be moving towards the zero mark. Considering the current savings product slump, would your money be better spent on overpaying your mortgage?
Wondering why Overpaying Your Mortgage could Save You £1,000s in Interest?
Overpaying your mortgage to reduce the size of your loan means you can pay it off quicker and pay less interest over time. You also do not pay interest on the amount of money you overpay. With such low interest rates on savings, you could use your money to avoid paying higher interest on your mortgage. Seems like an easy decision, however, there are several considerations that should be factored in …
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- Find out how much can you overpay per year on your current mortgage – many lenders allow 10% of your mortgage to be overpaid per year if you have a fixed or tracker mortgage. If you are on your lender’s standard variable rate (SVR) you are typically able to overpay by as much as you like, which is one of the main appeals of SVR mortgages (but beware, your monthly payments on a SVR mortgage are typically significantly higher and you could well pay more interest if you stay on this type of mortgage after a fixed rate deal runs out).
- Be aware of early repayment charges and exit fees – whilst some lenders honour the 10% rule, some do not. This is because lenders want you to stay with them after your cheaper rate ends. Also, they will have calculated how much interest they would earn from you overall during your mortgage deal, so overpaying will mean they get less. Overpayment fees can be between 1% and 5% of the overpaid amount. Penalties will vary depending on your mortgage deal, so check with your lender first and compare the amount to how much you’d save with the new lower mortgage
- Is your mortgage your most expensive monthly debt repayment? – if the answer if no, it may be sensible to clear other expensive debts before considering making overpayments on your mortgage
- Consider how you would feel if your rainy day fund dried up – if you are the kind of person who feels happier knowing they are prepared for a temporary financial disruption, then tying up your lump sum in a mortgage overpayment may not be the best decision for you. As a general rule, the advice is to aim to have around 3 to 6 months of your regular expenses (e.g. bills, typical amount spent on food etc.) saved in case of emergencies. Some mortgages carry flexible features, which act as a high-rate savings account, allowing you to overpay and borrow back without a penalty. However, these types mortgage often carry higher interest rates than standard mortgages, which may outweigh any gains on savings
- Use free online tools – if you are considering overpaying your mortgage using savings, there are several tools online which calculate what interest rate you would need on a savings account to beat making extra mortgage repayments. There are also tools which calculate how much you would save by overpaying.
- Consider your loan to value (LTV) – when you overpay, your LTV ratio falls quicker. Consequently, should you look to remortgage, you may be able to secure a cheaper deal if you have overpaid, which would save you even more money
Are you considering remortgaging your property so that you can overpay and be mortgage-free quicker? Call Mortgage Advice Services today on 1332 257 087 for expert, friendly, impartial advice on the right remortgaging options for you.