Is it a smart move to overpay your mortgage?

 

Mortgages are the most expensive and the largest debt, which ties you with payments for innumerable years, sometimes until you kick the bucket. Fearing your unpredictable financial condition and the base rate by the Bank of England, you might decide to overpay your mortgages, hoping that it will save you money in interest and dwindle the repayment length. The sooner you are released from your obligation, the better it is.

Overpaying your mortgage means making higher monthly payments or paying a lump sum at any point in the year. The extra money that you pay goes directly towards the mortgage balance. You will save a lot of money in interest over time as a result of a reduction in the size of the mortgage.

At the time of making overpayments, it is vital to ensure that extra payments will whittle down the principal amount and the repayment length rather than monthly instalments. You will see a boost in your savings if you do not pay interest on additional payments. There are a few lenders who charge early repayment penalties in order to cover their loss in profits.

You can significantly reduce the size of mortgage payments by simply making 12 to 15 additional payments.

What factors should you consider before deciding on overpaying?

Overpaying sounds very appealing, but you cannot jump to the conclusion that it will save you money. There are many factors that you should deliberately evaluate to ensure that the savings are a paltry sum. Many people vacillate between saving and overpaying. Overpaying is a better idea than saving money if it helps you save more interest than what you earn on your savings.

In fact, even if you are to pay an interest penalty on early repayment charges, you will end up saving more money than what you earn on savings. Sadly, savings accounts do not yield high interest. However, there are a few other factors that you should look at while deciding whether it makes sense to overpay your mortgage principal.

Do you have expensive debts?

First off, you need to take stock of your overall financial condition. If you do not have any other outstanding debt, you should opt for paying more than the required sum. However, it needs a second thought if you have some expensive debts. For instance, if you have a secured loan with bad credit, you should try not to overpay your mortgage.

Doing that will put pressure on your budget. You will struggle to keep up with payments of secured loans. In the end, your lender will charge interest penalties and late payment fees on your debt, increasing the size of the debt. Overpaying on your mortgage will cost you too much money in the long run if you have high-interest debts that you cannot pay as a result of it.

It is enjoined that you should never make additional payments on your mortgage if you have outstanding debts to pay off. You should clear high-interest debts, including credit card bills, before overpaying your mortgage payments.

Are you supposed to pay early repayment charges?

The next thing you need to look over is how much you are supposed to pay as early repayment charges. How much early penalties you will pay depends on the type of mortgage you have. Further, it depends on the lender’s policy on how much amount you will be able to pay over the set limit. It is not in your hands to decide how much amount you will be paying every year over the set limit.

If you are on a fixed interest-rate mortgage deal, you are not allowed to pay more than 10% of your mortgage balance without any penalty. Likewise, if you are on a standard variable deal, you can overpay as much as you can. However, experts recommend that you should compare the savings by overpaying with the savings by remortgaging. If you can save money in interest by remortgaging, overpaying is not a good idea.

It can be hard to make a decision about it. Contact a mortgage broker or a financial expert. They will guide you on whether it makes sense to overpay when you have yet to remortgage. Remember that not all lenders approbate overpayments. If you still overpay or pay more than the recommended amount, you will end up being charged with early repayment fees, which amounts between 1% and 5% of the overpaid amount.

Take a look at the following example:

Suppose you have a two-year fixed-rate mortgage worth £200,000, and you decide to overpay in a lump sum. If the additional payment or clubbing of all extra payments you make throughout the two years is not more than £20,000, you do not have to pay any early repayment fees.

However, make sure that your lender allows you to pay 10% of your unpaid mortgage. Some lenders do not have a clause of overpayment, and if you overpay your mortgage, you will have to incur early repayment fees regardless of the size of the additional payment.

As far as it is about the penalty you will be imposed, you will have to ask your lender. All details are given in the contract, so make sure you double-read the fine print in your agreement. Along with the early repayment charges, there could be additional charges.

Sometimes, the early repayment fees could be so high that it does not show any significant savings in your interest payment. Lenders particularly charge very high penalties to mitigate the loss in interest profits. Whether it is a small instalment loan or a mortgage, lenders make profits through interest rates, and therefore, they are exponentially high. Overpaying means they will lose profits, and early repayment fees pave the way for diminishing the loss.

Do you have a sufficient emergency fund?

The next determinant for whether you should overpay your mortgage or not is whether you have a sufficient emergency cushion. Unexpected expenses can crop up at any time, and you know that mortgage ties you for a long period of time. Having insufficient savings will cause problems for you down the line.

An ideal size of an emergency corpus is worth six months of savings on your living cost, but since you have decided to overpay your mortgage, you must have savings of at least a year’s worth of your living expenses.

Bear in mind having an insufficient emergency cushion will force you to take out a loan to meet unexpected expenses. As small loans are very expensive, you will find them a bit hard to repay. As a result, you will end up rolling over the loan. Eventually, you will find yourself in an abyss of debt. So, there is no point in overpaying a mortgage when you have no sufficient emergency cushion.

The bottom line

Overpaying a mortgage sounds quite appealing, but you should carefully analyse your overall financial condition before deciding on it. Take help from foundation home loans intermediaries if you are unable to decide whether you should overpay or not. There is no point in doing so if you do not save money in the long run.