Overpaying your mortgage saves thousands in interest

Overpaying your mortgage might be part of your plans, especially if you are given some extra cash. And if that’s the case, then it’s worth thinking about.

Making additional payments can help you become mortgage free sooner. And if that isn’t enough, then it can also save you thousands in interest.

According to new research by Santander, overpaying your mortgage by £57 a month would save £12,983 in interest on your mortgage. And researchers say that you would be mortgage-free two years and one month earlier than planned.

As ‘Dry January’ continues, researchers reckon that £57 a month is the equivalent of 12 pints per month at the average rate of £4.81! While that sounds like a lot of beer, it’s the equivalent of two-and-a-half pints a week.

Anyone drinking 20 pints a month (around 4.5 pints a week) would be saving a whopping £20,432 in mortgage interest payments if they use the cash to overpay! That means diverting the cash would not only be good for your health, you’d also pay your mortgage three years and four months early!

And if you don’t want to be totally alcohol free, making overpayments of just £10 a month on a £200,000 mortgage could save more than £2,490 in interest.

What is overpaying your mortgage?

Overpaying your mortgage is simply paying more than your usual monthly amount. Making additional payments might be something you want to do regularly or just when you have extra cash.

For example, you may have been made redundant, had a cash gift or received inheritance. In such cases, you might decide that reducing your mortgage is better than putting it into savings.

Most lenders with fixed rate or tracker mortgage allow you to overpay by a certain amount without incurring early repayment charges (ERCs). This is usually a percentage of the outstanding sum. ERCs are incurred simply because the lender is effectively asking you to compensate them for the interest they’ve lost by you paying your mortgage early.

If your mortgage is on a Standard Variable Rate, then you can overpay as much as you like.

Overpayments can be made as and when you can. So, you don’t have to commit to making monthly overpayments.

What are the main benefits?

As we have seen, there are many benefits to overpaying on your regularly monthly mortgage repayments. These include:

• Lowering the interest you pay.

• You are likely to be mortgage free sooner.

• Interest on future payments will become smaller.

• You increase the equity in your home. That means you lower your ‘loan to value’ (LTV) ratio. LTV measures how much you’re borrowing when compared to the total value of your property. You’re likely to access more competitive mortgage rates in the future due to having a lower LTV.

Are there drawbacks?

As ever, you need to consider both the pros and cons when making a financial decision. And while reducing your mortgage and lowering interest sounds positive, there are other points about overpaying your mortgage to consider. These include:

• In extreme cases lenders will charge you ERC fees if you overpay more than 10% of the balance. Some lenders allow 20% overpayments.

• Once you have spent the money on overpayments, you don’t have it for any emergencies. If you do receive some money, consider other more expensive debts that might be better to reduce more quickly. For example, credit cards or unsecured loans usually have higher interest rates.

What should I do?

If you’re enjoying Dry January and think you’d like to use the spare cash to overpay your mortgage, then you can contact your mortgage broker. If you haven’t used one, you can always contact our team today.

Remember that your home may be repossessed if you do not keep up your repayments on your mortgage.