You can spend years trying to get a mortgage, but then you want to get rid of it as soon as you can.
Your mortgage is probably your biggest monthly expense. Overpaying your mortgage could reduce what you owe faster and let you be mortgage-free sooner. Most lenders will let you overpay by 10% a year without incurring any penalties, but some – such as NatWest –allow you to overpay by up to 20%.
Many of the bigger lenders even have apps that will let you set up and manage overpayments. But of course, the hardest thing is finding the money to do it.
At Continuum we are looking at tactics to help you become mortgage free years earlier.
1. Overpay by a set amount each month
The simple way to overpay is to pay a set extra each month. Decide how much you can afford. You may notice the extra cost at first, but after a while you will probably just accept it as part of your inevitable outgoings.
It could be very worthwhile. On a £200,000 mortgage over 25 years at 5%, overpaying £100 a month could save around £24,000 in interest and help you pay off about three years earlier.
2. Round up your monthly payments
Rounding up is based on some basic human psychology, namely that when we see big numbers we don’t worry so much about the small ones. It’s a principle some banks have used to encourage savings. When you make a purchase of £3.50 for example, the money that leaves your current account will be rounded up to the nearest pound and the extra 50p sent to a savings account.
The same approach to your mortgage could see a monthly repayment of £850 rounded up to £900.
Rounding up by £50 a month on a £200,000 mortgage over 25 years could knock nearly two years off your term and save over £13,000 in interest.
3. Maintain your repayments when your mortgage rate drops
If you’re on a variable-rate mortgage and your repayments drop when interest rates fall, you could maintain your repayments at their former level.
This makes budgeting easy, as you’ll already be used to paying at the higher rate.
If a £200,000 repayment mortgage at 5.25% falls to 4.25%, the monthly payment falls from £1,198.50 to £1,083.48 a month. Sticking to the original payment would pay the loan off nearly four years early and save £21,950 in interest.
4. Pay twice a month
Mortgage interest is often calculated daily, meaning that every month we have 30 or 31 days of interest added.
But what if you make smaller payments every two weeks instead? You pay off your mortgage faster, for two reasons. First, because there is a little less to charge interest on by the end of each month. And second, because of the vagaries of the calendar, paying every two weeks is the equivalent of making an extra month’s repayment each year.
Not all lenders will let you do this, but it could mean substantial savings for you if they do.
5. Pay in a windfall
Putting your annual bonus, inheritance, or even cashback into your mortgage can be a painless way to overpay.
Adding the extras to your mortgage repayments mean your usual budget won’t be affected.
6. Remortgage
Can’t afford to overpay your mortgage, or stuck with a lender that won’t let you? If you have been on your current deal for a while and come to the end of any fixed rate period, the chances are you could save by remortgaging. You may have paid off some of your original loan, and house price inflation may mean your loan is a smaller proportion of your home’s value. Both could improve your Loan to Value ratio, and the lower your ratio, the lower your interest rate could be.
Arrange a new mortgage with a lower rate, keep up your old monthly repayments, and you are making a very worthwhile overpayment, at no increased cost to you.
7. Get some expert help
Arranging an overpayment plan or a remortgage can be simple, but you need to be aware of any pitfalls – like early repayment charges. And if you have other debts, it might make more sense to concentrate on paying them off first.
To find out if early repayment could work for you, get in touch with our experts.
https://www.telegraph.co.uk/money/property/mortgages/should-overpay-mortgage
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to a particular mortgage product and you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.
You may have to pay an early repayment charge to your existing lender if you remortgageThe Financial Conduct Authority does not regulate some aspects of Debt management.
