If you’re paying off a mortgage each month but have some savings earning a low rate of interest, you might think that using this money to pay off your mortgage sooner is the right thing to do. However, whether or not this could work for you depends on your circumstances.
Why pay your mortgage off early?
Paying off your mortgage early can be advantageous depending on your circumstances. It means that:
You’ll start paying off the debt from your mortgage sooner meaning you may pay off your mortgage quicker.
There is no interest to pay on top of the amount you’re overpaying by.
In later years, as you pay more and more of your mortgage off, your monthly repayments will reduce giving you more disposable income or more to put into savings.
Things to consider before you start overpaying
What interest do you earn on your savings?
Before you begin using your savings to overpay your mortgage, you should consider whether you can earn a higher interest rate on this money by saving it, against what you would save by paying off your mortgage early. In other words, is the interest rate you are earning on your savings higher than the interest rate charged on your mortgage?
As most people are aware, savings rates are historically low currently but it’s still important to consider all your savings & investment options before committing to using your money to pay off your mortgage sooner.
Any debts to pay off?
Typically the interest charged on unsecured debt, such as loans and credit cards is more than that charged for a mortgage – so it’s a good idea to look to pay down any existing debts before you begin to overpay on your mortgage.
Check early repayment charges first
You should always check your existing mortgage deal to find out the potential charges which may be applied in the event that you pay off your mortgage early. Most mortgage providers will allow you to overpay by a certain percentage (usually 10% but this will vary between different lenders and depend on the type of mortgage you have) and if you go over this amount, a charge is applied. It can be costly to overpay by too much so make sure you carefully check the details of your mortgage.
Leave yourself enough in reserve
Before committing your spare cash or savings to paying off your mortgage, consider what would happen in an emergency where you needed to find some extra cash. From home emergencies like boiler repairs or flooding to car trouble and medical treatments, there are a number of circumstances that would be tricky to manage if you didn’t have a pot of spare cash to dip into.
How mortgage overpayments work
It’s easy to see how a simple extra payment each month could save you money over the long term, and help to pay off your mortgage sooner. For example:
On a £250,000 mortgage being repaid over 25 years, at an fixed interest rate of 3.47%, you would normally repay £1,247.50.
If you added an extra £50 to your regular monthly repayment, you would save £8,249 in mortgage interest over the full term of the mortgage and pay off the mortgage sooner by 1 year and 5 months.
If you increase this to an extra £100 this would save you £15,437, in interest over the full mortgage term and leave you mortgage-free 2 years and 9 months sooner.
Please note, these calculations are for illustration purposes only and you should always check with your mortgage provider, specifically the amount of any fees that would be liable, before committing to mortgage overpayments.
In summary, it’s clear to see the advantages in overpaying on your mortgage, even if you just add a small extra amount to your regular mortgage payment. You’ll end up paying less in interest over the life of the mortgage and you will pay off your mortgage a bit sooner than you would if you maintain the regular payments.
However, it’s also fair to say that there are a number of pitfalls to consider, not least the fact that you may find you need access to your savings in an emergency, and committing any extra cash to paying off your mortgage quicker would make this difficult. You should also look at any outstanding debts and make sure these are paid off before overpaying on your mortgage, as the interest you pay on credit cards and loans is usually (although not always) higher than a mortgage interest rate.
Whatever your circumstances you can always talk to your mortgage provider and get some advice on your best options.