Have you heard of mortgage overpayments? Getting yourself a mortgage is fantastic. It gives you freedom to leave your parents house, move out of rental property and actually put a stamp of personality on your own home. Mortgages are expensive though. You’re not just going to pay back the amount you borrow. You’ll pay that and more on top because of interest.
There are some great mortgage rates to be snapped up at the moment but whatever the percentage on your agreement, you’ll pay back more than you borrow. That is the nature of mortgages, that is how banks and building societies are able to lend you the money. You may have heard people overpaying their mortgage to reduce the amount of interest they’ll pay.
Let’s have a look at mortgage overpayments, understand what they are all about and see if it’ll benefit you and your situation.
What Is A Mortgage?
In simple terms, a mortgage is a loan from a bank or building society for you to buy a property. The amount you can borrow depends on a number of factors, including what you want to buy and what your income is. Mortgages are secured loans, meaning that the lender will own part of the property until you have paid off the money in full. If you were to stop paying your monthly repayments, you could lose your home.
What Are Mortgage Overpayments?
When you agree on a mortgage, you will get a monthly amount that you will have to pay back. This could be £200, it could be £2000. It completely depends on your situation with your specific mortgage with your specific lender. Mortgage overpayments are when you pay back more than that monthly amount.
As an example, let’s say your mortgage is £100k. Your monthly repayment is £500 but when you make that payment your mortgage might only drop to £99,700. You’ve paid £500 but it’s dropped £300. That’s because the £200 is interest. That’s how the lender makes money. When you overpay, you clear more of the debt, so there is less of a sum to pay interest on. This means you’ll clear the debt faster and save money on interest payments.
Things To Consider
Whilst making mortgage overpayments to reduce the amount of interest you’ll have to pay over the duration of your agreement seems like a great idea, it isn’t for everybody. Think about it. If you have savings in a bank account, you can access them at any time. Even if they’re only making 0.5% interest a year, the money is there should you need it.
Whilst overpaying your mortgage will save you more in interest than you could make in interest from your bank account, once you’ve overpaid, the money is gone. It is yours no longer and if you get to a point where you need a lump sum, you won’t have one.
Maybe it’s a good idea to find a balance? Keeping hold of some cash and also overpaying a little bit. That way there is money there should you need it but you are also lowering the amount of interest you’ll pay in the long run.
Be Aware Of Your Agreement
Always double check how much you can overpay your mortgage by, per year. It is usually around 10% but different lenders will have different terms. If you pay back more than your maximum amount, you’ll incur fees and it will have been pointless making those extra payments. Most banking apps which show your mortgage deal will detail how much more you can overpay during the current year. Helping you make mortgage overpayments and keep an eye on things.
Mortgage overpayments can be fantastic and you can certainly clear your debt quicker and pay less interest over the duration of your loan. However, when we’ve seen jobs being lost. There have been insecurities come into play over the last few years. With that in mind, maybe not wise to throw all your spare cash at overpaying. Find a balance that works for your situation and you’ll still save money on those interest payments!
