The pros and cons of overpaying your mortgage
Overpaying your mortgage to clear it sooner sounds like an excellent step to take if you’re in a position to do so. However, it’s not always straightforward, and in some cases, other options may suit you better.
Read on to learn more about the pros and cons of overpaying your mortgage.
2 reasons to overpay your mortgage
1. You could be mortgage-free sooner
Owning your home outright is a life goal for many families, and it’s a key reason to overpay.
As the overpayment goes directly towards reducing your loan balance, rather than paying off interest, it could help you reach your goal sooner than you expect.
Imagine you have £150,000 remaining on a repayment mortgage with a 15-year term and an interest rate of 4.5%. Your regular repayment would be around £1,150. If you made a monthly overpayment of £200, you’d pay off your mortgage almost three years early.
Paying off your mortgage sooner has financial benefits (covered below) and may also have emotional advantages. For example, removing one of your largest financial outgoings could ease stress and improve your sense of wellbeing.
2. You could reduce the cost of borrowing
Even a seemingly small interest rate can add up when you’re borrowing large sums over a long period.
The good news is that overpaying could save you thousands of pounds over the full term of the mortgage.
Let’s go back to the above scenario – you have a £150,000 repayment mortgage with a 15-year term and an interest rate of 4.5%. Overpaying by £200 a month would save you more than £12,000 in interest payments alone.
Of course, paying off your mortgage early could also provide a welcome boost to your day-to-day finances.
So, if you’re able to overpay your mortgage, it might have financial and wellbeing benefits.
2 drawbacks of overpaying your mortgage
1. You could face an early repayment charge
If you’re considering overpaying your mortgage because you want to save money, it’s important to be aware of whether you’ll have to pay an early repayment charge (ERC).
When you have a mortgage deal, you can normally overpay up to 10% of the outstanding balance each year. If you exceed the overpaying limit, an ERC may be applied. So, check your paperwork to understand how much you’re allowed to overpay.
If you don’t have a mortgage deal in place, you can usually overpay without facing an ERC.
2. Saving or investing the money could make financial sense
If you’re looking at your options from a financial perspective, overpaying your mortgage might not be the best choice.
The interest rate you pay on a mortgage may be lower than the returns you’re able to generate by saving or investing the money.
For example, if the interest rate on your mortgage is 3.5% but you can earn 4% in a savings account, you’d be better off financially by saving instead. If you invested the money, you might be able to achieve even higher returns. However, it’s important to note that investment returns cannot be guaranteed.
So, when you’re weighing up the pros and cons of overpaying, it could be useful to consider alternative uses for your money.
Take some time to understand if overpaying is right for you
When comparing overpaying to other options, there is no one-size-fits-all answer as to which one is best. Instead, it’s essential to consider what your priorities are before deciding if overpaying is right for you.
We can help you assess your mortgage options
Whether you value the flexibility to overpay or other features, please contact us to talk about your mortgage. We’ll take the time to understand what type of mortgage suits your needs and can offer guidance throughout the application process.
Please note:
This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. 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.
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. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
