Here’s how much you can really save by overpaying on your mortgage

With the cost of living crisis intensifying, reducing your existing debt to make monthly expenditures a little more manageable will be on many homeowners’ minds. Along with paying some extra off credit cards, targeting your mortgage with regular overpayments, no matter how small, can make a huge difference to the amount you owe in the long term.

Read on to discover why overpaying on your mortgage is a great step in the right direction and how much you can really save.

What are the advantages of overpaying on your mortgage?

One of the main and most obvious benefits of overpaying on your mortgage is that you’ll pay far less interest on the outstanding balance. With interest rates at a high to counter soaring inflation – the Bank of England (BoE) recently increased interest rates to 3.5% – paying less interest for the long term is a very attractive prospect indeed.

By overpaying on your mortgage, you’ll be reducing your outstanding balance, shortening your term and lowering the total interest that you’ll pay on your home.

If you are thinking of remortgaging, overpaying on your mortgage now will leave you with more equity in your home, meaning better mortgage deals could become available to you.

How much can you really save by overpaying?

Whether making a one-off overpayment or paying more than your monthly mortgage payment on a regular basis, every little helps and you’ll reap the rewards financially.

Here’s an example – for a £150,000 mortgage at a rate of 5% over a 20-year term, overpaying by just £100 per month could slash the price of your mortgage by £14,300. You’ll also pay off your mortgage three years earlier!

What are the downsides of mortgage overpayments?

Looking at your entire financial health before deciding whether making overpayments on your mortgage is vital. Other debts which incur interest, such as credit cards and loans, should take priority.

Having a ‘rainy day fund’ established is also worthwhile before making mortgage overpayments. A savings pot will ensure those unforeseen emergencies can be handled without taking out additional credit.

Are there any restrictions regarding the amount you can overpay?

There are some restrictions when it comes to the amount you can overpay on your mortgage, although this varies from mortgage product to mortgage product. Here Ideal Home explains more about the common overpayment rules that could apply:

“…check with your mortgage provider to see what it allows. This is particularly important if your current mortgage offer – a fixed or discounted rate for a set term, for example – still has time to run. Many providers only allow overpayments of 10% of the remaining balance during this term. By contrast, if your deal has finished and you’re now paying your provider’s standard variable rate there shouldn’t be any limits on the amount you can pay.”

If you do exceed the limit set by your lender with your overpayments, you could incur an early repayment charge (ERC).

Need advice on your current mortgage or want to find out more about your options going forward? Contact our team today for support.

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