2019 is finally here and if you’re looking for ways to improve your finances this year, overpaying your mortgage could save you thousands of pounds.
If you’re wondering how overpayments work and you’d like to work out how much money you’ll save, here are a few things to think about.
How do mortgage overpayments work?
If you’re in a position to throw more money at your mortgage debt, you could reduce the amount of interest you have to pay.
There are two ways you can overpay your mortgage:
- You can overpay on a monthly basis
- You can overpay with a lump sum
Can I overpay my mortgage?
Most lenders allow their customers to overpay their mortgage by a certain amount each year. The exact amount will depend on your lender and current mortgage product.
Generally, lenders will let you overpay by 10% of your mortgage debt each year, though it’s wise to check first.
Should I overpay my mortgage?
If you’d like to make overpayments on your mortgage, it’s wise to make sure you have a healthy emergency fund first. This will help to lessen the impact of any unexpected expenses or a loss of income.
Once you’ve built up an emergency fund of between 3 to 6 months of essentials living costs, overpaying your mortgage could be a wise move.
Overpaying can be particularly smart if you pay a higher interest rate on your mortgage debt than you can earn on savings.
It’s also flexible and relatively low-risk.
Before you make the decision to overpay your mortgage, it’s worth considering whether you’d be better paying other types of debt or pouring your spare money into a pension or investments first. I can’t tell you which would be most cost-effective for you, but you could get in touch with a financial advisor for assistance.
Are you overpaying your mortgage?
Yes! I overpay my mortgage by £20 a month. I also have an emergency fund (which I add to each month) and a workplace pension. Once I’ve built up a healthier emergency fund, I’d like to start investing.
How do I overpay my mortgage?
Get in touch with your lender. When I decided to overpay my mortgage by £20 a month early last year, I simply called my mortgage provider and asked them to change my repayments. The phone call lasted about 10 minutes and that was that!
How much money could I save if I start making mortgage overpayments?
The amount of money you could save will depend on a variety of factors such as your debt amount, your interest rate, your mortgage term and the amount you choose to overpay.
Here are a few examples:
If you have £100,000 of mortgage debt, an annual interest rate of 3.5% and a remaining term of 30 years, overpaying by £20 a month will save you £5,055 in interest alone and allow you to pay your debt off in full 2 years and 2 months earlier.
If you have £150,000 of mortgage debt, an annual interest rate of 3% and a remaining term of 35 years, overpaying by £50 a month will save you £13,615 in interest alone and allow you to pay your debt off in full 4 years and 7 months earlier.
If you have £200,000 of mortgage debt, an annual interest rate of 4.5% and a remaining term of 25 years, overpaying by £100 a month will save you £21,117 in interest alone and allow you to pay your debt off in full 3 years and 6 months earlier.
I used the Money Saving Expert mortgage overpayment calculator to calculate the above examples.
Habito don’t charge a fee and whether you’ve got a small deposit, you’re self employed or you have a less-than-perfect credit rating, they’ll do everything they can to help you get the mortgage you need.
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