Taking on a mortgage to buy a home, whether it’s your first time or you’re moving up the property ladder, is something that all but the wealthiest pretty much accept as a fact of life.
Of course, it’s a huge commitment involving large sums of money but ultimately the monthly payments are a cost we’re willing to bear for a long period; in some cases, until we retire.
Traditionally we tend to pay a mortgage over a number of years, typically around 25, and of course many things can change in our lives during that period whether that’s moving jobs, having a family or relocating.
In the last few years, we have been fairly lucky to live in a low interest rate environment – although that is beginning to change now, particularly with rising inflation.
Low interest rates have meant mortgage costs have been more affordable than ever and there has been less incentive to try and pay off a mortgage earlier than the agreed term.
However, overpaying your mortgage has undoubtedly become more popular in recent years especially with savings rates still at historically low levels.
It’s a not a stretch to think that most people would love to become mortgage free as soon as possible but what is the reality and how can it be done?
Simply, the more you put into a mortgage, the quicker the balance reduces and the less interest you will pay back over the term of the mortgage.
How to make an overpayment on your mortgage
If overpayments are a possibility for you, the first step is to check with your lender to see what limits they have for overpayments – this will depend on the mortgage product or deal you signed up to.
In general lenders will facilitate overpayments by allowing a certain percentage of the mortgage to be repaid each year, typically 10% if you are on a fixed rate deal. This would avoid any early repayment charges.
In most cases this can be overpaid through a lump sum payment, a monthly amount or a combination of both. You will have the option to decide this based of course on the amount you can afford each month.
One important aspect to consider before embarking on any mortgage overpayments is to repay any unsecured debt such as a car loan or credit card borrowing first – by its very nature, mortgage borrowing, which is secured, is always likely to be cheaper than unsecured borrowing.
Will overpaying my mortgage shorten the term? Are there any other benefits?
Making overpayments can have a number of benefits beyond shortening the term of the mortgage, not least it increases the equity you own in your property.
The consequence of this is that, if you decide to look for a new mortgage deal in the future you are likely to have more options and lower internet rates when it comes to remortgage.
Lenders generally offer better rates for a lower loan-to-value (LTV) – basically the size of loan you require compared to the value of the property. Simply, it’s a lower risk for them so you are rewarded with better rates. Overpaying now could save you even more interest further down the line.
How much could you save by overpaying your mortgage?
A brief example of what you could save can been seen on a mortgage of £100,000 with a remaining term of 25 years and an interest rate of 2%.
By paying an additional £50 per month as an overpayment would save you £3820 in interest.
Furthermore, the mortgage term will also reduce, in this case by three years and one month.
It goes without saying that you should think very carefully before making any decisions on overpayments and of course you need to look at how affordable this might be, and how it could impact your finances, particularly in this time of rising costs.
One very useful tool is an overpayment calculator which most lenders will provide on their website; they are easy to complete and will allow you to see exactly how much interest you will save and the effect on your mortgage term.
When it comes to mortgages there’s a fair bit to consider and regardless of what stage you are at, it’s always worth speaking with an independent mortgage broker who can equip you with the necessary information to help you make the right decision for you.
Darren Polson is head of mortgage operations at Aberdein Considine
