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Should you overpay your mortgage?

25th June 2018

It’s always said that one should strike while the iron is hot. To seize the day. With this in mind, many people look to take advantage of low-interest rates by overpaying a mortgage. However, despite the many advantages, it’s not always the best idea, with a number of factors that need careful consideration beforehand.

 

What does overpaying a mortgage mean?

 

Overpaying simply means paying back more of your mortgage than is required under its terms and conditions. Some decide that a sudden windfall or salary rise presents a great opportunity to shorten the duration of their mortgage. Meanwhile, others overpay during periods of low-interest rates in order to reduce the total amount of interest payable on the rest of the mortgage.

 

This can be done in two ways; either as a lump sum, or as a monthly arrangement. In the case of the latter, an amount paid each month is agreed with the lender beforehand.

 

Why overpay?

 

The amount of interest is based on the value still outstanding. The lower this value, the lower the interest payments – therefore reducing this value while you can seems like a sensible long-term strategy for those with the means to overpay. These savings can run into thousands of pounds, especially if overpayments are made early into a term.

 

Another advantage is the ability to reduce the term of a mortgage by paying it off early. Not only is this a great way to relieve financial stress later in life, it provides flexibility too. After all, if you overpay for half a year then encounter financial difficulty later, you might have the option to underpay, as long as the total amount balances out.

 

Things to consider

 

So far so good, so why wouldn’t you overpay? There are a couple of main reasons actually. Firstly not everyone has the means to. It can be tempting to put savings into overpayments but putting £300 towards a mortgage only to find you need a new washing machine may not be an ideal scenario to find yourself in. Whilst some lenders allow you to borrow back without a penalty, some won’t, so it’s important to check first.

 

Lenders have differing policies when it comes to the amount that you can overpay. For example, most will allow an overpayment of up to 10% of the total outstanding value during the term of a fixed rate mortgage. However, again it’s important to check as some will charge a penalty fee and others will simply refuse to allow overpayments.

 

Although a mortgage is likely to be your largest debt, it may not be the one that attracts the most interest. Clearing credit card debt or unsecured loans is therefore often a better use of money. It’s also worth considering whether your hard earned cash is better placed in a retirement scheme. When employer contributions are factored in it may well outweigh the benefits of overpayment – especially if savings are limited.

 

Get advice

 

Overpaying a mortgage is a great way of saving money if you have the security to do so, however, it’s not a decision to be taken lightly and can leave you vulnerable to unforeseen circumstances. All things considered, it’s worth speaking with your lender before making any decision. Alternatively, our friendly mortgage team at IMC are always delighted to give fair, impartial advice to anyone making their mind up. As they say, strike while the iron’s hot, get in touch!

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