23 May 2017

WHY OVERPAYING ON YOUR MORTGAGE CAN MAKE A LOT OF SENSE

WITH BASE RATE AT ROCK BOTTOM, AND SAVINGS NOT EARNING MUCH IN THE WAY OF INTEREST, OVERPAYING ON YOUR MORTGAGE CAN BE A SENSIBLE DECISION. YOUR MONEY WILL WORK HARDER FOR YOU AS YOU PAY BACK YOUR MORTGAGE MORE QUICKLY AND REDUCE THE INTEREST YOU PAY OVER THE LONG TERM.

Since mortgage rates have been at record lows, more people have been taking advantage and overpaying in an attempt to pay less interest and clear their balance more quickly. Someone with a £500,000 mortgage with a 25-year term and a rate of 2 per cent who overpaid by £200 per month, for example, would pay £15,732 less in interest and reduce their mortgage term by two years and nine months. Another advantage of overpaying is that you get used to a higher mortgage payment each month so when interest rates do start rising, it should come as less of a shock.

Borrowers should take heed of the particular requirements of their lender and check before making any overpayments. Most lenders will let you overpay by a maximum of 10 per cent of the mortgage amount per annum; any more than that and you will be charged an early repayment charge for doing so, which defeats the whole object.

While reducing your mortgage is nearly always a good idea, before you do overpay, you should also clear more expensive debt on credit and store cards, as those will be costing you more. There is little wisdom in overpaying when your mortgage rate is say 3 per cent, when you have debt on your credit card which is charged at a rate approaching 20 cent. Clear the most expensive debt first before overpaying on the mortgage.

If you do decide to overpay on your mortgage, you must also make sure to keep some money back for emergencies, as money overpaid is often impossible to get back again. A contingency fund equal to say six months’ worth of outgoings kept in an easy-access savings account is often a good idea, although the exact amount will depend on what you are personally comfortable with.

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