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overpay mortgage

Should I overpay my mortgage with savings?

If you’re in the fortunate position of having extra funds available for savings and investments, then you are likely considering making additional payments on your mortgage. But how much will you actually save? And what are the pros and cons of regular mortgage overpayments? And should you overpay on your mortgage or save the money in an account? Find out from UK mortgage advisers.

How much can you save by overpaying?

Currently, few people in the UK make additional payments on their property mortgages – around 7% - often because the monthly payments are already quite high, because they have other expenses to consider, or because they are not fully aware of how mortgage overpayments work to help you achieve long-term savings. 

The benefits of making regular overpayments on your mortgage are threefold. Firstly, you can reduce the mortgage term of your loan to pay off your property faster, and secondly, you can reduce the amount of interest/mortgage rates that you need to pay off the loan. This brings the full amount you paid for the property much closer to the sale price you offered, which can be a significant saving. Lastly, the final benefit is that the money you would save on mortgage rates is likely to be significantly higher than the returns you would get investing it in savings accounts and is at much lower risk than many other forms of investment.

Of course, how much you will save by depositing additional payments depends on how much you are borrowing, the term of the loan, and how much interest you will pay as per the mortgage rates. With a larger mortgage at a higher interest rate, you’ll make a higher percentage of savings if you pay it off quickly. Typically, most homeowners and property investors can save tens of thousands of pounds by paying off their mortgage early using this technique.

Generally, lenders allow up to 10% of the outstanding balance to be overpaid per year. However, it is also important to note that not all mortgages allow overpayment and you should read the terms of your mortgage offer carefully to see what is available to you. If you are unsure, speak to a mortgage broker or the lender directly.

 

Monthly overpayment calculator for mortgages

The best thing about making regular overpayments on your mortgage is that a small sum can make a big difference, even if it’s only £50 a month, so you don’t have to wait for a large lump sum or windfall. You don’t have to be consistent with how much extra you put in each month, although this can help with your calculations. 

Here are some examples of how much you will save if you overpay your mortgage.

On a home with a fixed-rate mortgage and a balance of £180,000 over a mortgage term of 25 years and a 2.5% interest rate, here’s how overpaying saves you money.

 

Overpayment amount

Total savings over the full term of mortgage

Mortgage term reduced by

£50

£5,321

2 years

£100

£9,789

4 years and 8 months

£150

£13,596

5 years and 1 month

£200

£16,881

6 years and 4 months

£250

£19,744

7 years and 6 months

 

Of course, if your fixed-rate mortgage balance is higher, you’ll save even more by overpaying. For example, paying an extra £350 per month in additional payments on a £250,000 loan under the same term and interest rate will bring monthly payments up to £1,472 but save you £27,571 and cut your term by 7 years and 6 months.

 

Overpaying boosts your LTV

When getting a home loan or a BTL mortgage, your Loan-to-Value ratio or LTV is one of the most important factors in determining the terms of your mortgage. If you have a lower LTV, you can usually borrow more and get more favourable terms, which will be less favourable if your LTV is high. If you make regular overpayments on your mortgage, it helps support your LTV by showing lenders you are a reliable and stable investment – a bit like how you can boost your credit record by paying off your credit card debt and putting in extra to cover new expenses. This means that if you decide to remortgage, you will have greater capital invested in your property and, therefore, a lower LTV. You will benefit from this when you come to remortgage as you may get access to better interest rates. The best LTV to aim for would be between 70-60%, with 60% LTV offering the most competitive rates.

 

When is the best time to make an overpayment on a mortgage?

Generally speaking, there’s no specific time to plan your mortgage overpayment because the interest on most variable and fixed-rate mortgages is calculated daily, so the difference between overpaying today or tomorrow is minimal. However, it’s also essential to look at the terms of your mortgage contract or the type of mortgage you have, as this will have information that may be relevant.

For example, if your interest is calculated monthly, quarterly, or annually on your type of mortgage, it’s best to get the lump sum overpayment in BEFORE the calculation date and not after.

 

What should I consider before overpaying my mortgage?

This doesn’t mean that you should go ahead and start emptying your savings accounts into your mortgage, as there may be penalties if you don’t do it the right way. When considering if overpaying your mortgage is right for you and developing your strategy, it’s advisable to take the following into account:

Lender overpayment charges or penalties  

Lenders understandably want to earn money off their investment, which is the interest on their loan to you. To make this viable, there are often restrictions on how much you can overpay to secure a minimum return for them. Generally, you can overpay by 10% of your mortgage balance per year if you are on a fixed-rate mortgage or discount rate. It’s worthwhile to have your mortgage broker go over the fine print on your type of mortgage and make sure you know precisely how to overpay to avoid repayment charges, which can be as high as 1-5% of the amount overpaid.

Early exit fees or exit repayment charges

Some lenders apply penalties or repayment charges to accounts paid off before they are due, which can be costly. Your broker or mortgage advisers can help you calculate your mortgage overpayments to reduce the mortgage significantly and avoid early exit fees.

Alternatives to mortgage overpayment

If you are on a tracker mortgage or outside your discounted period, then interest rates can climb quite high, making overpayment very appealing. However, there are alternatives to your lender’s standard variable rate (SVR), including remortgaging to get a much more competitive rate. Again, chatting to your broker will help you run the numbers against the base rate and other deals to see which option will pay off the best in your circumstances.

Offset mortgages

In an offset mortgage, you are essentially already overpaying on your mortgage because they link your mortgage to your savings and only charge you interest on the difference. This type of mortgage means you are offsetting your savings against the loan amount, making this a combination of mortgage and savings accounts. This way, you can reduce your monthly payments, shorten the term, and release yourself from the mortgage sooner. Another benefit of this option is that your savings stay yours – they aren’t locked into the mortgage repayment. This means that you can overpay your mortgage by as much as you want and use the money as an emergency fund if needed, with the interest rate and term fluctuating as the amount changes.

Additional high-interest debts

When evaluating your options, consider any other debts. If the interest rate on the debts is higher than what you will save on the mortgage (if you have a 4% interest rate on debt but only pay 2% interest on your mortgage), it’s better to settle the higher interest rate debt first. This usually includes credit card debt and short term, small loans.

Emergency funds

It’s always a good idea to have 3-6 months’ worth of expenses covered if you lose your job, cannot work for any reason, cannot fill your BTL property with tenants, or have a surprise bill you need to cover. This is more important than overpaying on your mortgage because if you run out of funds, your home can be seized to repay lenders, or you could be forced to borrow more money at a higher-interest rate to keep up with payments.

Is it better to save instead of overpaying a mortgage?

This depends on two main factors – how high of an interest rate you can get for your savings and how much you can save by overpaying your mortgage without incurring penalties. And before you use your current interest in savings, it’s worth seeking an advisor to see if there are better options out there that you aren’t using.

Then you can draw up a simple comparison to show which option will work better for you, keeping in mind the considerations mentioned above. Here’s an example to show you how this works:

If you have a mortgage debt of £10,000 at 2.5% interest over 20 years, the annual cost of your interest is about £20 per month. However, if you have a savings account offering 1% interest, you’ll only earn about £8 per month. As you can see, paying off the debt with that lump sum overpayment rather than saving it in an account will net you an additional £12 per month. Of course, if the amount is higher, the returns are higher too.

Can I reduce a mortgage payment term?

Yes, you can reduce the term of your mortgage through making additional payments or a lump sum overpayment and become mortgage-free sooner; but this does depend on the terms of the mortgage, which your lender sets. In almost all cases, you can instruct your lender to either reduce the monthly bond premium or the term of the loan as you wish, but there can be consequences. That’s why it’s best to read through your mortgage agreement clearly with the help of mortgage advisers to see if there are any catches, such as early exit penalties or overpayment penalties. Depending on your contract, individual terms, and your financial circumstances, your adviser can help you decide whether it is better to reduce the payments, the term, or even both.

Speak to leading mortgage advisers for competitive mortgage deals and remortgaging deals in the UK

If you want to get a clear and accurate idea of how to overpay on your mortgage for your property in the UK, if you need a remortgage for your property, or you want to get a deal that supports an aggressive overpayment on your loan, our mortgage brokers are ready to help. With over 20 years of experience, a strong network of lenders, and being fully independent, we can provide objective, practical insight into commercial, residential, short-term, and BTL mortgages. 

 

We can also help you find the best possible remortgage lender and mortgage deals for your requirements – many of which are simply not available without the assistance of a broker. That’s because, as independent brokers, we have access to all mortgage options across all lenders, including direct to broker deals that are not offered to clients who do not have brokers. Ethical, straightforward and transparent, our team will work with you to find the best mortgage deals, the right loan structure, and the best terms for your investment, making your property experience a rewarding one and helping you to maximise savings.

 

 

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE