The basic economic problem, having finite resources and infinite options, affects everyone from individuals to nation-states. Families often struggle to decide whether to save or invest when handling mortgage payments. However, should you overpay your mortgage, you may be able to save thousands in interest and climb up the property ladder with full equity along the way.
Like every investment, mortgage overpayment comes with pros and cons. Understanding both sides of the argument and seeking impartial mortgage advice helps homeowners find their perfect repayment solution through sensible spending and financial security.
What is Mortgage Overpayment?
After approving a mortgage, lenders set monthly repayments based on the deposit and the interest rate. However, borrowers with spare cash can choose to overpay their monthly repayments. When done right, this saves homeowners money by lowering the total interest, while also shortening the repayment term. Should you overpay your mortgage via lump sum or standing order, you could increase your equity and make the most of favourable interest rates.
However, overpayment shouldn’t always be the first priority, as other investments or repayments could save more in the long run. Lenders may also charge fees for those who repay too much per month, incentivising long, regular mortgages repayments.
Should you Overpay Your Mortgage – The Pros and Cons
Save Money When Savings Interest Rates Ebb Low
The question might seem complex, but overpayment boils down to comparing the savings interest rate with the mortgage interest rate. If the mortgage interest increases faster than the savings interest, moving your money creates huge savings. This depends on the mortgage contract, and whether the mortgage is fixed, variable, or flexible. It’s always worth seeking impartial mortgage advice to decide the best move.
Flexible Mortgages Allow Flexible Saving and Spending
Some mortgages let you overpay whenever suits you, then withdraw or offset later payments if money gets tight. Overpayment can either pay off the balance or decrease next month’s payment. This lets you invest in the future and mitigate upcoming expenditure. In this way, mortgage overpayment functions as a high-interest savings fund. Some flexible mortgages even let you withdraw overpayment funds and recalculate interest as you go along
Larger Equity Helps Homeowners Negotiate Better Mortgage Contracts
Lenders calculate mortgage rates based on loan to value ratios or LTV. In essence, a mortgage lent on a 5 per cent deposit comes with a higher interest rate than a mortgage with a 40 per cent deposit. Overpayment can help lower interest over time, saving money in the long term. Some homeowners reinvest these savings back into mortgage repayments to increase their returns.
Lenders May Punish Excessive Overpayments
In many cases, homeowner savings equate to lender losses. To protect their interest, lenders often place fees on overpayments exceeding 10 per cent of the agreed repayment rate. Lenders often charge a fee of around 3 per cent of the excessive overpayment. While this may seem small, it can render the savings over the interest rates negligible. These fees vary between types of mortgages and types of lenders, making impartial mortgage advice a vital resource for the sensible spender.
You May Miss Out on Other Saving or Investment Opportunities
The ratio of savings interest rates to mortgage interest rates depends on your bank as much as it depends on your lender. Many Brits stagnate on low-interest-rate savings when they could find a far better rate elsewhere. Should you overpay your mortgage, you may miss out on a higher interest rate at another bank, while incurring large overpayment fees from your lender. You should also prioritise paying off any high-interest debts or loans before looking into mortgage overpayment.
Emergencies Require Liquid Assets
Even the savviest interest rate calculations fail to account for unexpected financial emergencies. Car breakdowns, roof leaks, house fires, legal expenses, or redundancy could hit at a moment’s notice. So before considering mortgage overpayments, financial experts recommend you build up savings of around six months wages, just in case. Regardless of interest, this offers stability and ‘liquid premium’.
Should You Overpay Your Mortgage – Conclusions
Mortgage overpayments depend on your mortgage agreement, your savings interest rate, and your cash flow. However, most importantly, they also depend on how you feel. Your finances should always be geared towards your stability and wellbeing. Impartial mortgage advice provides support and information, giving you the tools to decide on your terms.
The content of this post was accurate at the point of publication and is subject to change.