Mortgages are confusing and all of the terms and conditions can feel really tricky to navigate. Recent research from the consumer magazine Which? shows almost half of homeowners overpaid on their mortgage last year, with 18-24 years olds leading the pack with as many as seven in 10 making overpayments.
But does overpaying on a mortgage mean and will it benefit you?
David Blake, a mortgage expert from Which? explains: “Overpaying on your mortgage means paying more on a monthly basis or as a lump sum payment than what you’re contracted to do.”
Most mortgages (though not all – it depends on your personal loan) offer you the opportunity to overpay by around about 10% every year and some will allow unlimited overpayments, Basically it means you’ll pay the debt off quicker if you pay more money – so the benefits can be numerous, says Blake.
“That said some products don’t allow overpayments so it’s really important people check the terms,” he adds.
Should You Be Overpaying?
It depends entirely on your personal circumstances and the type of loan you have. Key to consider is whether the interest rate you’re getting on your savings is higher than what you’d save in the long run overpaying on your mortgage.
“Some people would prefer not to overpay and use that money elsewhere – for other people it might be a priority,” Blake says. But if you can afford it and, after weighing up your finances, you decide you’re best off using the money on reducing the size of your mortgage, the benefits can be numerous.
“Most lenders these days work on a daily interest calculation,” says Blake. “What that means is any overpayments you make you feel the benefits of immediately on your monthly mortgage payments and the balance you owe.”
Going into periods of economic uncertainty, such as now with Brexit, most people will benefit from owing the smallest amount of debt they can, Blake says. “You want to have the lowest possible level of debt you can against your property value, which has the potential to go down. And having the lowest possible debt will guard you against interest rate changes.”
Also to consider is that once you make an overpayment, it’s gone. So it’s really important you plan ahead and make sure you can part with the cash.
How Does Overpaying Work?
Top of the list of things to check out before taking the plunge is whether your lender allows you to make overpayments. “If so, you should ask [your mortgage advisor] about calculating the benefit of overpaying and it will depend whether the provider can provide advice or not,” Blake advises.
Otherwise, get in touch with an independent mortgage advisor to discuss your personal circumstances. They may be able to help you work out clever ways to save more money – for example whether an offset mortgage might be better for you. An offset mortgage, he says, could help you to continue having access to your savings while also helping to bring your payment costs down.
An offset mortgage takes into account the value of savings you have in the bank. So if you have a mortgage of £100,000 and have savings of £10,000, you’ll only pay interest on £90,000 of the mortgage debt.