Mortgages are dull. Let’s be honest. They’re huge commitments, they’re complicated to arrange and in the current climate, it’s understandable if the thought of a mortgage gets you a bit jittery.
Putting rising interest rates to one side (easier said than done) and ignoring the doom and gloom news we’ve been exposed to over the last few months, it’s time to talk about mortgage overpayments.
What are they? Are they a good or bad thing?
In this four-minute read, we explain the ins and outs of overpayments.
(Note: This isn’t financial advice, and if you’re thinking about making overpayments you should speak to your lender or a financial adviser in the first instance.)
What is a mortgage overpayment?
In simple terms, it’s paying more than your contracted monthly mortgage payment. So, if you have a mortgage of £1,500 per month, and you pay £2,000, you’ve made a £500 overpayment. Simples.
You can make a one-off lump sum payment or regular overpayments.
Can you make overpayments on any mortgage?
Some lenders are happy for you to make as many overpayments as you like, whilst others may cap the annual overpayment percentage. It’s important to find out what category your mortgage falls into, as you could be charged a penalty for going over the limit.
The benefits of overpaying a mortgage might not be as great if you have an interest-only deal. If you have a repayment mortgage (where you’re paying the capital and interest) then overpayments will reduce the mortgage balance (i.e. the loan on the property itself). With an interest-only mortgage, overpayments reduce your future interest payments, however, you’ll still owe the original sum you borrowed to purchase the property.
What are the benefits of overpayments?
An overpayment now means you’re saving money in the future, as you’re effectively reducing the debt and the interest on the amount you borrowed to buy your property. So, as the big supermarket says: every little helps.
By making overpayments, you’re also increasing the equity in your home as you’ll own more of it than you would by making your contracted monthly payment. And every overpayment is a tiny step closer to being mortgage-free.
What are the disadvantages of overpayments?
It may mean you have less cash to hand for that rainy day. By using your savings to overpay a mortgage you could leave yourself financially vulnerable if something unexpected occurs, such as job loss or illness.
Other debts you might have (such as credit cards) are far more expensive, so it makes more sense to pay them off before considering mortgage overpayments.
If you’re considering making an overpayment, always speak to an expert first. They can help you decide what the best course of action is for your individual financial situation.
At Chamberlains, we can’t promise you a cheap mortgage deal, but we can promise to put you in touch with fee free, brilliant mortgage advisers.