Could overpaying on your mortgage be a wise move? Using some of your savings or disposable income to make additional mortgage payments can result in considerable gains in interest. However, with any such decision regarding financial planning, it’s always best to to ensure this is the right move for your personal circumstances.
Advantages of overpaying on your mortgage
Overpaying on your mortgage has a number of advantages for many homeowners. The interest you pay on your mortgage is significant, and often higher than any possible returns in savings – even long-term ISAs and bonds. So it makes sense to allocate funds to mortgage overpayments before savings accounts.
The majority of lenders will allow you to overpay up to 10% of your outstanding mortgage balance each year, provided you are still within the introductory fixed-rate or tracker period. If you have passed this period and have a standard variable rate (SVR) mortgage, you should be able to make additional overpayments whenever you wish. In all circumstances, however, do be sure to check with your lender before making any overpayments because these rules are not universal.
Overpaying on your mortgage means that you’re getting rid of the debt from buying your home in less time – the quicker you pay it off, the more money you save. Furthermore, you won’t pay interest on any amount that you overpay. Whilst you may have to tighten the purse strings for a while, the long-term financial gains from overpaying on your mortgage are huge.
Potential disadvantages of overpaying on your mortgage
Before making any overpayments on your mortgage, you must read the small print to ensure that your lender and particular mortgage agreement allows you to do so. The penalties for paying too much into a mortgage can range from 1% to 5% of the overpayment sum.
It’s also important to take other debts into consideration before allocating additional funds to mortgage overpayments. Clearing the most expensive debts first is crucial. If you have loans and credit card debt, for example, check the interest rates that you’re paying on these. If any of the rates are higher than your mortgage, which they likely will be, clearing these high-interest debts before making overpayments on your mortgage makes sense.
Planning for a rainy day is also something you should bear in mind before overpaying on your mortgage. As soon as you pay additional funds into your mortgage, the cash is no longer available for any emergencies that may arise (unless you have a flexible mortgage with a borrow-back facility). If all of your spare cash is tied up your mortgage, you may have to borrow more money from elsewhere – or be left without sufficient funds to make your minimum mortgage payment – when the unexpected happens.
Mortgage overpayments vs Savings
Provided your mortgage lender allows you to make overpayments on your current deal, you’re debt free, and you have planned for the unexpected with an emergency fund, overpaying on your mortgage could be the best decision – and will lead to greater gains than putting this additional cash in a savings account. Make an appointment with our friendly team and we will be happy to help make plans for paying off your mortgage early!
is an independent mortgage advisor serving the greater Glasgow area. Whether you are planning to buy your very first home and need the right , or are looking to due to a house move or to growing family – we understand your journey is so much more than a financial process, it’s a journey to achieve your dreams, improve your lifestyle and achieve your true potential.
Anchor text: consult an independent financial advisor