Mortgage Introducer reports that the UK has 25 million mortgage-backed homeowners, the highest number in Europe.
In recent months, high inflation has forced the Bank of England (BoE) to increase its base rate – and so the cost of borrowing – while last September’s disastrous mini-Budget saw mortgage rates rise sharply.
In this unstable climate, you might be considering overpaying your mortgage, if you can afford to.
Paying off the amount you owe sooner might be a good option, lowering your interest payments while shortening your mortgage term. But charges could apply, and there might be better uses for your cash.
Keep reading to discover the pros and cons of overpaying your mortgage.
Most mortgage providers allow some level of penalty-free overpayments, but be sure to check
Before getting into the pros and cons of overpaying your mortgage, it’s important to note that different lenders will have different rules.
When banks or building societies calculate the interest rate they offer you on a mortgage, there are various factors they’ll consider to make sure they don’t lose out. This is especially true when offering you a fixed- or discounted-variable rate deal.
As a result, many banks or building societies attach early repayment charges (ERCs) to their mortgage products.
You’ll need to check how much your provider will let you overpay, how much their ERCs are, and when they kick in. Most lenders will allow you to repay 10% of your outstanding balance each year without incurring an ERC although this varies across lenders, so research is key.
Pros of overpaying your mortgage
1. Overpaying could save you thousands of pounds in interest payments
The interest rate attached to your mortgage means that the longer you take to pay off your debt, the more you’ll end up paying.
By overpaying your mortgage, you could save yourself some of this additional interest, while also shortening the mortgage term.
According to the Times Money Mentor, the savings you make could be in the tens of thousands, although this will depend entirely on your personal circumstances, so always seek advice before you make a decision.
2. You’ll need to weigh up the long-term benefits of overpaying your mortgage against investing or saving your money
Overpaying your mortgage could save you money in interest and reduce your term.
But you might also consider using that money elsewhere. Despite rising interest rates, savings accounts aren’t delivering huge interest currently. The stock market, on the other hand, might offer a greater opportunity for returns but with added risk attached.
Investment returns might outweigh the money you could have saved in mortgage interest, but invested funds can fall as well as rise. This could be a high-risk approach so you’ll need to think carefully about your attitude to risk and your capacity for loss.
Overpaying your mortgage could mean you head into retirement debt-free. That could make a huge difference to the lifestyle you can live after work, as all of your retirement income will be going into maintaining your dream retirement.
If you have spare cash and your mortgage provider allows it, overpaying your mortgage may be worth contemplating.
Cons of overpaying your mortgage
1. You could face a penalty for making overpayments
You’ll need to look into the ERCs your mortgage provider charges and be sure you don’t overpay more than you are allowed.
Typically, the limit is around 10% of the total remaining mortgage debt. If you overpay more than this, you could be liable for an ERC of up to around 5% on the amount that exceeds the limit.
Different providers will have different rules, so be sure to check with yours. You’ll then need to decide whether the reduction in interest payments and mortgage term outweighs any potential charge.
2. Overpaying on your mortgage could make you financially vulnerable in other areas
While overpaying a mortgage could have long-term benefits, you need to be sure you can maintain your financial resilience in the short term.
If the larger mortgage payments mean that a sudden change of circumstances – a job loss, or an accident or illness, say – would leave you struggling financially, it might be better to hold off.
You might first consider ensuring you have an emergency fund in place and that your more expensive, high-interest debt is cleared.
That means that if you do decide to overpay your mortgage in the future, you can do so with peace of mind that you can still ride out a potential future shock.
Get in touch
Expert advice can make a huge difference when making financial decisions that could affect your long-term prosperity. There are pros and cons to early repayment of a mortgage and the right option will be individual to you.
Speak to Investment Sense today and we can help you to decide on the right way for you to budget now, as well as the most sensible use for any additional funds you have.
Please contact us via email at info@investmentsense.co.uk or call 0115 933 8433.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Think carefully before securing other debts against your home.
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
