The pros and cons of making overpayments on your mortgage
Rising rates could prompt some people to consider paying off extra chunks of their home loan – does it make financial sense? By Vicky Shaw.
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Your support makes all the difference.Jumps in mortgage rates may be prompting some homeowners to consider whether now could be a good time to make overpayments on their mortgage.
Overpaying could help to reduce the bill shock when your current deal ends.
Around 2.4 million fixed-rate mortgages are due to end between now and the end of 2024, according to trade association UK Finance.
For some people, making overpayments on their existing deal could help to push them into a lower loan-to-value (LTV) bracket.
Generally speaking, being in a lower LTV bracket could boost a borrower’s chances of being offered better mortgage rates than they may have been able to get otherwise, although people’s individual circumstances will vary.
Matt Smith, a mortgage expert at property website Rightmove says: “Lenders will have different rules regarding mortgage overpayments, but a general rule of thumb is that homeowners can overpay by around 10% of their outstanding loan each year.
“One of the first things homeowners will have to consider is whether the purpose of overpaying on their mortgage is to ‘cash it in’ and become mortgage-free quicker.”
He explains that some lenders allow borrowers use overpayments to create a “buffer”, giving some flexibility to underpay at other points in the year, which may suit seasonal workers for example.
“For those that want to pay off their mortgage more quickly, they will then need to assess their budgets and decide whether it suits their personal circumstances to overpay regularly each month, or in one lump sum,” adds Smith.
“A lump sum, though potentially harder to save and budget for, has a greater impact on reducing the total amount of interest a mortgage-holder will pay over the course of their loan.”
There are some potential drawbacks with overpayments though to weigh up.
If you’re considering using a savings nest egg to pay your mortgage down, consider what you’d have left if you needed money for a financial emergency, such as for an unexpected expense or a job loss.
There are also some aspects of savings accounts to consider if you’re considering using savings to pay down a mortgage.
Some savings accounts have restrictions around withdrawals. Savings rates have risen recently – and you may find your savings rate is higher than your current mortgage rate, if you took out a fixed-rate mortgage a while ago.
Also, check your mortgage small print as there could be penalties for paying over certain amounts.
And if you have other debts, it’s worth considering which ones to prioritise paying down.
Individual circumstances will vary, so all options should be weighed up very carefully and what’s the right decision for one person may not be suitable for someone else.
MoneySavingExpert.com has a mortgage overpayment calculator at moneysavingexpert.com/mortgages/mortgage-overpayment-calculatorand the Government-backed MoneyHelper website has a mortgage interest calculator at moneyhelper.org.uk/en/homes/buying-a-home/mortgage-calculator which could help people with their research.