Want to make overpayments on your mortgage? Darren Polson runs through how it works and how the type of mortgage you have will make a difference to the amount you can overpay
The Question
I’ve recently received an inheritance and would like to use some of it to ‘overpay’ my mortgage. Sadly, I cannot pay the entire loan, but I could reduce the loan by as much as 40% with this money.
How do I make an overpayment, and will I incur any charges or fees for making a partial repayment?
Darren’s Answer
Thank you for your question and I am sorry to hear about your loss.
Using the inheritance to reduce your mortgage balance and either term or monthly payment can be beneficial. There are different types of mortgages which will allow overpayments. Generally, most lenders will allow this.
It does depend on the mortgage type you have:
Overpaying a fixed-rate mortgage
With fixed rate mortgages, many lenders will allow a maximum of 10% of the outstanding mortgage balance to be overpaid each year.
This can be either 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.
Overpaying on tracker and variable rate mortgages
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.
In terms of pitfalls, 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.
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 they come down, you will be in an advantageous position.
How overpaying your mortgage works
With the above rate types, when making an overpayment, many lenders will ask whether you wish to reduce your monthly payment or reduce the term of the mortgage.
In some instances, and depending on the amount of your overpayment, you can significantly reduce the term of your mortgage, meaning you are mortgage-free sooner.
If you are on a fixed rate, you could wait until you are due to remortgage and pay the full 40% or pay 10% each year as noted above.
Although you will need to contact the lender directly to make the payment, this kind of situation can be difficult to navigate. I’d recommend speaking to a whole of market mortgage broker, who can provide advice based on your circumstances.
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.
