Mortgage Overpayments

Is it worth making overpayments on my mortgage?

At present, savings rates are low and therefore making overpayments is really a no-brainer for most of us. You can save £10,000’s in interest and reduce your mortgage length if done correctly.

Some of the pro’s:

  • Reduce your mortgage length by years
  • You will pay zero interest on the overpayments
  • Saving on mortgage interest can often beat putting your money into savings.
  • Banking institutes do look highly at overpayments when it comes to approving mortgages or loans.
A mortgage of £10,000 at 3%, results in annual interest of £300 or £10,000 of savings at 1%, gives you annual interest of only £100. 
Therefore paying the debt with the £10,000 savings would see you £200 a year better off.

If your mortgage is interest rate is 2%, you would need a savings account rate of 2.5% or above (before tax) to make saving outweigh the benefit of overpaying. You can find calculators via google that will provide you the figure determined to your mortgage interest rate.

Few things to check first…

  • Some mortgage providers set limits (commonly 10% of the original loan amount or £10,000) check this first, otherwise you could be stung for huge overpayment fees.
  • Pay your most expensive debt first, clear high interest credit card balances or loans before making overpayments.
  • Ensure your mortgage provider doesn’t lower your fixed mortgage payments, otherwise this will not reduce your term or interest savings.
  • Ensure you have adequate emergency funds for unexpected problems. (Exception – mortgage with flexible features)

Flexible Features

Some mortgage providers ‘store’ your overpayments and allow you to withdraw these overpayments if need funds.

How much should I over pay?

However much you can afford to pay, it doesn’t need to mega bucks and it can be the odd payment here and there.

Paying just £50 monthly on a 25year, £200,000, 3% interest rate mortgage would save you £6,722 and nearly 2 years.

£200 monthly would save a whopping £21,609 nearly 6 years.

Again, you can play around on repayment calculators found via google and work out the best amount for you.

Hopefully, this blog post has highlighted the benefits of mortgage overpayments.

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