Is it worth overpaying on your mortgage?

With the average mortgage term 25 years in the UK, and 35-year mortgages growing increasingly common, the reality of paying this long term debt from month-to-month can be a bitter pill to swallow. Getting out of debt and officially owning your own home sooner rather than later is certainly something that plays on many people’s minds, especially once you calculate how much interest you really pay on the average residential mortgage!

Making room in your budget for mortgage overpayments is what many aspire to do as they settle into property ownership, but is it really worth it? Read on to discover the pros and cons of overpaying, and the basics of making your own mortgage overpayments.

Why overpay on your mortgage?

The first and most obvious benefit of overpaying is that you’ll get to pay off your mortgage even sooner.

By overpaying, you can save an incredible amount of money. You’ll also dramatically reduce your mortgage term. Here NatWest shares an example of just how much you could save by overpaying:

“Take the example of a mortgage of £150,000 with 20 years left to run and a current interest rate of 4% a year (standard variable rate). At the moment, monthly repayments would be £909. But by paying an extra £50 a month, if the monthly payments remained the same the term of the mortgage would be reduced by 18 months, saving a total of £5,807 in interest – assuming that the 4% remained in force for the duration of the loan.”

Overpaying will have a positive impact on the loan-to-value (LTV) ratio of your property too, which will reduce due to the increased amount of capital paid and give you access to even better deals when the time comes to remortgage. 

More competitive mortgage deals mean your monthly expenditure will also decrease, giving you money to enjoy more of the things you love.

When overpaying doesn’t make sense

Overpaying on your mortgage doesn’t always make sense. For homeowners who finance using mortgage products that don’t allow overpayments, the extra penalty charges that are incurred as a result of overpayment may mean more cons than pros. For those with other debts, including credit cards and personal loans, clearing these first could be a better move than overpaying on your mortgage.

Using your savings to overpay on your mortgage may also be a poor decision, especially considering the current economic climate. With interest rates remaining high and savings rates equally as generous, putting cash away for a rainy day rather than overpaying on your mortgage could be a smarter way to manage your money.

How to get started with overpayments

If you’ve decided overpaying on your mortgage is the right step for you, there are a couple of tasks that should be on your to-do list before you begin your overpayments. Gaining an understanding of your current debt profile is a must. As we mentioned previously, more expensive debts should be paid off first. Please note, this doesn’t include student loans or 0% interest credit.

Digging deeper into your overpayment limit is another essential. Most fixed and discount rate mortgage products allow you to overpay by up to 10% of your outstanding mortgage balance per year. Standard variable rate (SVR) deals and selected trackers tend to have no such restrictions, with customers able to overpay by as much as they like.

It is also recommended that you keep a reserve of cash to bolster your savings instead of spend it all overpaying your mortgage. 

For advice on and support with all things mortgage, please contact our team today.