Should you overpay your mortgage, how do you calculate it and should you put money into savings instead?
Overpaying your mortgage can be a way to reduce your debt quicker and save thousands on interest - but there are some factors you need to consider beforehand
IF you've come into some extra cash, overpaying on your mortgage means you can reduce your loan and it can help you to save thousands in interest.
When paying off your mortgage you'll usually pay set monthly repayments, which are calculated depending on how much you're loaned, the interest rate and the period you agree to pay it back over.
Paying more than the set amount can help you to clear your debt quicker than planned and reduce the interest on your loan.
Overpayments can be made using a lump sum or by regular monthly payments.
But there are some things you should take into account before overpaying, such as how much you can repay by and penalty charges that could be imposed.
We've put together a guide on whether overpaying on your mortgage is the right choice for you and how much you could potentially save.
Why should you overpay your mortgage?
Overpaying on your mortgage can help to reduce your loan and, as a result, cut the amount of interest you pay on it.
It could also give you the chance to underpay in the future, but you should check your lender's policy to see if this is something it'll allow.
What's more, if you're planning to remortgage in the future then overpaying can reduce your loan-to-value (LTV) ratio so you'll have access to cheaper deals when it comes to doing so.
Keep in mind that your bank or building society will only let you can overpay by a certain amount before charging a penalty.
Most lenders cap this at 10 per cent of your total mortgage balance a year, so on a £200,000 mortgage this would be a maximum overpayment of £20,000 a year.
If you go over this amount you could face charges of between one to five per cent of the amount overpaid.
The only exception to this is if you're paying a SVR (standard variable rate), which your lender will usually move you onto after the introductory deal ends.
In this case you can usually overpay by as much as you want but as always, it's worth checking with lender beforehand.
How to switch your mortgage
HERE'S what the Money Advice Service says you should watch out for when you're thinking about switching your mortgage:
- When to switch your mortgage. You should check if you can save by switching your mortgage when your current deal is about to come to an end, if your lender changes your interest rate, or once a year if you're not tied into a deal with early repayment penalties.
- How to find the best deal. You can use comparison websites to search for the best mortgage deal or, if you need a bit more help deciding what's best, use a broker. If you use a broker, check what fees it charges and if it can look for deals across the entire mortgage market.
- Check for remortgage costs. There might be high early repayment charges to pay if you are leaving before the initial fixed period ends, and there may also be an exit fee if you leave your existing lender. When it comes to the new lender, you might be charged valuation and legal fees as well as a booking or arrangement fee. So check that it's worth switching once the fees have been taken into account.
How do you calculate how much it will save you?
If you're thinking about overpaying on your mortgage, it's worth putting the figures into an online calculator to see how much you're going to save.
For example consumer site where you input your current mortgage debt, remaining mortgage term, annual interest rate, mortgage type and the type of overpayment you intend to make.
For example, say you had a 25-year £200,000 mortgage at a rate of 2 per cent and you wanted to make a one-off overpayment of £5,000.
By overpaying you'd save £3,170 in interest and pay off the debt nine months earlier than planned, according to the calculator.
Is it better to overpay your mortgage than put money into a savings account?
If you've got some extra cash you may be weighing up whether to stash it away into your savings instead.
First, before overpaying on your mortgage, you should consider paying off other other non-mortgage debts that may have higher interest rates, such as credit cards, loans and overdrafts.
And it's always worthwhile to have some emergency cash set aside for instances such as redundancy or home repairs.
If you've got all these covered then the next step is to compare your mortgage rate to your savings rate.
Overpaying is only cost effective if your mortgage is at a higher interest rate than what you can achieve on your savings after tax. Whereas if you've got a higher rate on your savings compared to your mortgage, then opt to save instead.
Currently there are no savings accounts paying more than the average mortgage rate of 2.6 per cent, so chances are it's better to overpay your mortgage.
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