When it comes to our monthly spend, for the majority of us, our spend will go on household bills. Our gas, electricity, grocery, internet, and phone. The list goes on and on. But the payment that takes up the most each month has got to be mortgage repayments. If you are a homeowner, then more than likely you’ll be tied into these repayments for quite a number of years. After a bit of time, then you might be in a different circumstance than you were when you took out the mortgage. So you might be able to make overpayments on your mortgage.
With savings rates being at rock-bottom, for many people making overpayments on their mortgage is a no-brainer. It can help to reduce the interest, so in the long term, it can save you a lot of money. It all sounds good, right? It isn’t all necessarily good, though. There could be repayment penalties, the possibility of losing an emergency fund, among a couple of other things. So this quick guide will help you to decide whether making overpayments on your mortgage, if you’re in a position to do so, could be beneficial or not.
If you are able to make some repayments, then it can be a big way to boost your cash flow. Not being tied up with repayments and interest rates until retirement can be a great way to get you on track to financial freedom. Here is why:
- One of the biggest things is that you’ll be eating in the debt that you will have built up on your way to buy your home. So it will mean paying it all off quicker.
- You won’t be paying as much interest as you’ll have overpaid a certain amount. So when you first looked at a home loan calculator, it might have calculated how much you’d be paying back. But that number can be reduced quite significantly if you overpay on your mortgage repayments.
- The money that you will have saved on the interest can quite often be better than the returns that you would have got from putting it in a savings account. Savings rates are pretty low at the moment, so that is definitely worth taking into consideration.
But if your circumstances have changed, or you have built up some savings, you do need to sit and work out some sums, before you just invest all of your savings into paying off your mortgage. You need to check what the deal is with your lender. Some banks won’t let you overpay each year. Some will, but it might only be around 10%. If you do overpay and haven’t checked the fine print, then it could end up paying fees that could amount to thousands. This can be especially true if you are in a fixed rate or introductory rate. When it comes to paying a standard variable rate, in most instances you can usually overpay each year. The only thing is that the standard variable rate can be quite expensive. So it could be worth looking to see if remortgaging is going to be better for you than overpaying.
The reason that there may be fixed penalties is because lenders want you to stay choosing them when the cheap introductory rate has ended. They will have factored in a certain amount of money coming in from you with a fixed rate mortgage deal. So, of course, they want you to stay with them, making your repayments each month. Obviously, when you overpay, they will get less.
One other factor to consider if you’re thinking about making mortgage repayments is that you should look at any other outstanding debts that you have. A really crucial part of debt is to clear the most expensive debts that you have first. They might not have started out as the most expensive, but if they have the highest interest rates that are just spiraling out of control. Once you do this, the interest can be kept under control, which in turn, helps to save your money in the long run, which will help to clear the the debts that you have, including your mortgage, earlier.
It can be worth thinking about building up or saving an emergency fund. If you have accumulated something in your savings, then you need to think if it is worth keeping it in savings, or worth making the mortgage repayments. Old-school financing might make you err on the side of caution as you might want to keep it for a ‘rainy day.’ If you are someone who is in high-interest debt, such as with credit cards, then this probably wouldn’t be the best idea. If you have credit card debt or payday loan debt, then savings should be used to clear it. If you are otherwise debt-free, other than a mortgage that is, then it might be considered a good idea to save, rather than clear your mortgage. But you need to check all of your interest rates workout what path will be best for you.
One tricky thing with overpaying your mortgage repayments each month, then any cash will be gone, more than likely. So it could mean no money for an emergency fund. If things like that were to happen, such as a medical emergency, or a home related disaster like a flood or leak, then it could mean you are having to borrow again. And even though you have made earlier repayments, it won’t necessarily stop you being charged for future missed monthly repayments. So where you can, having an emergency fund is a good idea. If you have built up enough for a few months worth, then it could be a good idea to think about making overpayments on your mortgage. But it is your decision if you want to start making earlier payments without any backup savings.
An exception to this ‘rule’ could be getting a mortgage that has flexible terms. Some mortgages will have them, and they can be beneficial to you. So if you are thinking of remortgaging or choosing a mortgage for the first time then looking for some flexible terms could be a good idea. It could be a mortgage with a borrow-back facility. If there is one, then it could allow you to overpay from time to time; when you can. This kind of mortgage would allow you to borrow the overpaid money back if you need to, without any charge or penalty. So for this kind of mortgage, then it makes more sense to put any spare cash into this kind of mortgage, rather than into savings.
If you’ve carried on reading this far, then we’ll make the assumption that you are debt-free, other than a mortgage, and that you have an emergency fund. So now the decision needs to be if you should make some overpayments on the mortgage or to save the cash elsewhere. You should only overpay if it makes financial sense to do so. A good line to follow is that if you can get a better rate for your money to be in savings than you would if it was in your mortgage, then saving is the best way. But on the flip side, if your mortgage rate is better than the savings rate, then in that instance, it would make sense to overpay on your mortgage repayments. So for some people, they may find it makes complete sense to overpay on some of your mortgage, but not all of it. The most important thing to do is to make sure that it is the best decision for you. If it is worthwhile for you, then it does make sense.
But can overpaying really save you money? In all honesty, overpaying on a mortgage can save you tens of thousands of dollars over the span of a mortgage. Let’s be honest; a mortgage is a loan for a massive amount. So reducing the interest that you’ll pay will save you a lot of money as you’ll be paying less and less on the large sum of money that you owe.
Overpayments don’t have to be large amounts, though. They can be pretty small if you need them to be. Even just an extra hundred dollars a month can really help reduce the amount of interest that you’ll pay. So in turn, that shortens the life of your mortgage, and in a lot of cases, can beat the savings rate. You can save a fair amount, as overpaying doesn’t get rid of the debt, it reduces that pesky interest that comes with all borrowing. That is what can make debt hard.
As you can see, there are many benefits to paying off a mortgage early. If you can stay on top of paying interest, then it really can make a difference to how much you end up paying overall. But you need to remember that there are some consequences when it comes to overpaying on your mortgage. So if you are thinking of overpaying, then you need to take some time to check what was right for you and the type of mortgage that you have.