The ‘best mortgage’ arrangement means something different for everyone and often different things to the same people depending on when you ask. Circumstances change; sometimes you can repay more money towards your mortgage than you could previously, other times you might find that financial constraints make it harder to maintain monthly repayments and so you might want to extend your mortgage.
Ultimately, mortgage decisions should be made with long term sustainability in mind and with the understanding that circumstances can change in the future. If you’re considering overpaying on your mortgage at the moment, take a moment to think through all the factors involved. Are you sure this is the best use of your available funds? Have you set aside enough cash to see you through future repayments? Does your mortgage even allow you to overpay or are you risking additional fees in doing so?
As with most things financial, the decision as to whether or not to overpay on your mortgage requires research and careful thought.
What is a mortgage overpayment?
Mortgage overpayments are essentially extra payments towards an existing loan, where a predetermined monthly repayment value is set between a lender and a borrower. This additional amount can be paid in two ways.
Mortgages tend to be the most financially significant monthly payments for most households.
The first is through a lump sum payment, which may be useful for those who have recently inherited money or sold an asset. The second is through increasing your monthly repayments as your salary increases or your interest payments decrease.
Mortgage overpayments can be made in two ways:
- A one-time lump sum payment
- Increasing your monthly payments above the required amount
Why (on earth would I want to) make mortgage overpayments?
Having a mortgage hanging over you, like any other form of debt, isn’t a great feeling. In fact, mortgages tend to be the most financially significant monthly payments for most households.
It goes without saying that we instinctively want to clear this debt as soon as possible. Mortgage overpayments can be a way to reduce the time it takes to clear your mortgage and allow you to focus your financial attentions on other things.
The interest repayments are always higher at the start of your mortgage as the interest is calculated on the total outstanding sum. If you can clear a large portion of the total loan earlier, you could end up repaying less for your overall loan.
Paying off your mortgage earlier should reduce the overall interest you need to pay. This is because your monthly interest rate is always calculated on the outstanding sum of the loan.
Key benefits of overpaying on your mortgage
- It can reduce the time it takes to pay off your mortgage.
- It can reduce the amount of interest you will need to pay and therefore reduce the total repayment sum of your mortgage.
- It can give you more flexibility when it comes to making monthly payments.
The best time to make overpayments
The really important thing to consider here is when the interest on your loan is calculated by your lender. If the interest is calculated daily or weekly, you can make overpayments whenever you like without paying much consideration to time.
However, if interest is assessed periodically - monthly or quarterly for instance - then you should make your overpayments at a time that coincides with your periodic calculation of interest. This will save you money.
Are there any downsides to making mortgage overpayments?
This largely depends on your personal circumstance and your overall financial capacity to pay off your loan in the long term.
Depending on the type of mortgage you have taken out, and the lender, you should be fully aware of the restrictions that relate to over payments on your loan. Restrictions usually come hand in hand with deals that have an end date. For example, a 2 year fixed rate.
Restrictions may come in the form of:
- No overpayments
- Financial penalties for overpayments
- A cap on overpayments – for example, a maximum 10% of the overall balance, per year.
Other important debts
Your mortgage is just one debt, but you might have others. If you do, you need to make a judgement on how to pay off your debt collectively rather than in an isolated manner.
Your goal should be reducing overall interest payments, so it’s not usually advisable to make overpayments on your mortgage if it means you will have to increase the time it takes for you to pay off larger or higher interest loans.
Lack of capital
If you find it a struggle to increase monthly mortgage repayments, or simply can’t find the extra capital to make a large lump sum payment, it’s probably worth sticking to your original payment plan.
If you put all your extra cash into your mortgage, you may leave yourself in a difficult position if you suddenly require funds for unexpected financial demands
Don’t forget about other monthly payments such as your savings, investments and pension when you’re weighing up long term financial products such as your mortgage.
Restrictions on overpayments
Different lenders have different rules regarding mortgage overpayments. Make sure you check the terms and conditions before you make a final choice with your mortgage. For instance, some lenders only allow overpayments of up to 10 per cent while others don't allow them at all or might hit you with a penalty. And once you have overpaid, you will not be able to just withdraw the funds if you decide you need the money back.
Should I overpay on my mortgage?
The answer to this is different for everyone. While there are clear advantages to getting your mortgage loan cleared as fast as possible, doing this without regard to your future circumstances or how your overall financial portfolio fits into the picture would be unwise.
Take the time to weigh up your personal financial situation and consider every angle before you make a final decision on making mortgage repayments.