What is a mortgage overpayment?
You probably think you already know what a mortgage overpayment is. But, for the avoidance of doubt, it simply describes paying more towards your home loan than is required according to the basic terms of your agreement. Clearly, it means you’ll clear your debt more quickly and save money in the long run because you’ll be paying less interest.
Bear in mind that not all lenders share the same rules when it comes to overpaying. In some cases, you could even get hit with a penalty should you pay above the agreed monthly sum for your mortgage. Or you may be limited as to how much you can repay, e.g. no more than 10% of the outstanding balance per year. Some lenders may even vary arrangements according to which of their products you have taken out, with different rules for fixed-rate or flexible deals.
If you’re on a Standard Variable Rate (SVR), you can usually overpay as much as you wish. However, these products can be expensive in the first place.
So do check any small print and terms and conditions before you overpay.
At the same time, should you use savings or disposable income to overpay on your mortgage, you could find yourself short of funds in the event of an emergency.
Different kinds of mortgage overpayment
If you’re considering overpaying on your home loan, there are a number of available options. Clearly, there’s the minimum sum you need to pay back each month. But you can typically exceed that amount at any time. That means your mortgage overpayment could fall into one of the following:
- Regular overpayments
You could agree, for example, to pay £100 extra a month on top of your minimal repayments.
- A one-off lump sum
If you happen to have some additional cash available, you could put it towards paying off your mortgage.
If you wanted and were able to, you could also use a combination of both these options. Various online calculators allow you to see how much you could save, and compare the benefits of the methods mentioned above.
And it’s easy enough to make overpayments – just sort this out yourself online. Or you could set up a separate standing order to cover it.
Finally, you could have your mortgage account as a payee via your online banking and make extra payments whenever you want.
Thinking about reducing your mortgage term?
Another option is to reduce your mortgage term, which could potentially lead to greater savings, although it can be a less flexible and riskier way of overpaying. It could even lead to higher monthly instalments.
Monthly or lump sum overpayments?
It’s entirely up to you whether you make overpayments as a lump sum or in monthly amounts. The latter could offer you greater predictability. And if you can’t afford the extra sums, you can simply return to your original arrangement.
Bear in mind that it could be tricky to get a lump sum back, for example in an emergency such as if you were to lose your job.
What are the key advantages and potential drawbacks?
Overpaying a mortgage may not be for everyone. If you have other debts, it would probably be worth paying those off first. Equally, as mentioned, charges and restrictions for overpaying might be in place. You may also find you have less spare cash to hand should you need it.
Equally, if you have an interest-only mortgage, any overpayments can only be used to reduce future interest payments and won’t affect your equity.
However, there are a number of real benefits, including:
- Overpaying reduces the amount of interest you pay off overall.
- It’s better value than putting any spare funds in a savings account.
- You also increase your equity, meaning you own more of your home – each overpayment takes you a little bit nearer to clearing the whole debt.
When is the right time to overpay?
There isn’t really a right or wrong answer to this one. It depends on various things and your own circumstances. But it is worth aiming to overpay just before your rate is re-evaluated and worked out. So find out when this happens before you do anything else.
Finally, once you have overpaid, getting money back in an emergency can be a challenge. You may even need to remortgage so that you release the equity back, so it isn’t always easy. What’s more, you may not be able to remortgage at a competitive rate.
How we can help
At the Mortgage Centre, we’re highly experienced mortgage advisers based in Clevedon, Bristol. We provide high-quality, trustworthy mortgage and financial advice, whatever your situation.
Get in touch today to find out more.