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What to consider with mortgage overpayments

by LLP Finance Reporter
28th Oct 22 12:48 pm

With rising interest rates and a currently unpredictable economic outlook for the UK, it may be worth considering overpaying on your mortgage, in an attempt to save money by paying less interest in the long run.

As well as reducing the amount of interest you pay on your mortgage and clearing your mortgage debt quicker, there are a few other benefits to overpaying on your mortgage:

Making overpayments could save you much more money than you earn from your savings unless the interest rate on your savings account (after tax) is higher than your mortgage rate. In the current low savings interest rate environment, this is unlikely.

The best mortgage deals tend to be available to those with more equity in their property. Using overpayments to increase your equity can, therefore, help you get a better deal when your fixed term ends. Increasing your equity also gets you a step closer to owning your home outright.

So can overpaying save you money? Kellie Steed, mortgage expert from money.co.uk answers frequently asked questions on whether you should overpay on your mortgage:

How much could I save by overpaying my mortgage?

“How much you can save by overpaying on your mortgage depends on the time left on your mortgage, the size of your remaining mortgage balance, the interest you’re paying and how much you overpay. There are tools such as overpayment calculators, which allow you to see how quickly you could finish paying off your mortgage and how much you could save in interest by overpaying.”

How can I make a mortgage overpayment?

“The best way to make your first mortgage overpayment is over the phone with your lender via bank transfer. This also enables you to check whether there may be limits on how much you can overpay without being penalised with charges. After the first overpayment, ask your lender the best way to make any further payments. This is usually by standing order, bank transfer, in-branch or over the phone.

“When making further overpayments, you may be asked whether you want to reduce the next monthly payment or keep this figure the same and reduce the term of your mortgage. It’s usually best to reduce the term of your mortgage, as in the long run, this will save you more money in interest.”

How much can I overpay?

“Generally, most mortgages limit how much you can overpay (especially on fixed, tracker and discount deals). Usually, you can overpay 10% of your remaining mortgage balance each year. The flexibility of this percentage depends on your mortgage deal, but if you exceed the limit, your lender may make you pay an early repayment charge (ERC). If you want to overpay regularly, it may be worth remortgaging onto a mortgage deal that allows for this”

What are the drawbacks of overpaying?

“There are a couple of important factors to consider before overpaying your mortgage. Some mortgage lenders charge a penalty if you pay more than your usual monthly amount, so ensure you check your lender’s terms before you start making overpayments.

“If the penalties outweigh what you will save, it will be more cost-effective to put your extra cash into a savings account instead. Once your current deal comes to an end you can typically use the savings to make a penalty-free lump sum repayment. If other debts cost you more than your mortgage, for example, if they have a higher rate of interest, it may be a good idea to pay these off first.

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