The Question
I’m a first-time buyer but thanks to 10 years of intense saving I’ve gathered together the equivalent to a 30% deposit. I’m ready to buy my first property and now I’m looking at mortgage options.
This is where I need advice. I’m employed, on a regular income but I earn commission. This can vary from pay cheque to pay cheque, but it could mean some months I could make a big payment on my mortgage.
I’d like to know if there are any mortgages which allow more than the standard 10% overpayment? If so, are there any fees or pitfalls I should watch out for?
Darren’s Answer
Firstly, well done on saving for your first property. It is clear you have put a lot of work in to save a great deposit and be in a position to make overpayments.
There are different types of mortgages which will allow overpayments.
Generally, fixed rate mortgages with most lenders allow for peace of mind as you know what your interest rate is and also how much you are paying every month.
This allows you to budget effectively and ensure you have a set amount you can potentially overpay to the mortgage.
With fixed rate mortgages, many lenders will allow a maximum of 10% of the outstanding mortgage balance to be overpaid each year, either via a lump sum payment or a monthly contribution to reduce the balance. This is based on the mortgage balance, which will go down each year, meaning the amount you can overpay reduces.
By sticking to the 10%, you will avoid any risk of an early repayment charge.
Other mortgage rate types such as tracker and variable often don’t have the same constraints as fixed rates, and some don’t even have an early repayment charge.
This means you can overpay as much as you like to the mortgage to bring down the balance.
On the downside, tracker and variable rates tend to be higher than fixed rates. So, if you do want that flexibility to overpay, you may pay more interest – which will undo some of your good work!
In addition, if there is a change in the market which causes rates to increase, your lender may increase those rates and you will pay more interest again. Conversely, if interest rates fall, you will be in an advantageous position.
Each of these options has something to recommend it, as do mortgages that can benefit savers such as Offset Mortgages, which can use what you have in a savings account to offset the amount of money you need to repay on your mortgage.
The money in your savings isn’t used to pay off your mortgage. It’s used to lower the total interest you’ll be charged on your repayments each month.
Lenders who offer this type of mortgage will ‘take away’ the amount in your savings account from how much you owe on your mortgage.
Therefore, you will only pay interest on what’s left, paying less interest than if you had a repayment mortgage.
Don’t forget that finding the right mortgage for your circumstances can be a challenge. Speak to a whole of market mortgage broker who can provide the best rates for your situation.
Meet our expert…
Darren Polson is head of mortgage operations at Aberdein Considine. He has been writing a regular column for What Mortgage for over two years and is now here to answer YOUR questions.
If you have a question for Darren please email kate.saines@emap.com or leave a message in the comments below.
