Lockdown might have meant a shock to the economy, but there is a surprisingly large number of people who are emerging from the Covid crisis financially better off.
You may have built up a sizeable cash reserve if lockdown spelt an end to commuting, shopping or evenings out. Your monthly outgoings may have been reduced by the growing phenomenon of working from home.
But what should you do with the money you have saved? At Continuum we are looking at whether overpaying your mortgage might be a sound idea.
Mortgages are a special kind of debt
Having debts of any kind means having interest to pay each month, which eats into your available funds.
The sooner we pay them off the better off we can be. A mortgage is simply a form of debt and it costs us substantial amounts of interest, so why wouldn’t we simply pay it off?
We might want to, but we should probably look at any other debts first. Things like credit cards mean much higher interest rates, often 20% or more, compared with mortgage rates which can be below 2% in the current market. Paying off the credit cards means plugging a much bigger hole in our pockets.
Mortgages in the UK for those with a good Loan to Value (LTV) are currently available in the 2%, or even sub-2% territory. In historical terms, they are incredibly cheap. This means that they should be the last debt you would choose to pay off. Other forms of lending will be costing you much more.
But with the credit cards finally dealt with, is it time to look at your home loan?
What is a mortgage overpayment?
When you take out a mortgage, your lender will calculate how much your monthly repayments need to be set at to ensure your mortgage is paid off at the end of the term.
A mortgage overpayment means giving your lender more than the minimum they demand. It could mean paying less for your mortgage overall and leave you mortgage free sooner. It can be done with a one-off lump-sum, regular overpayments, or both.
Some lenders allow unlimited overpayments, but some limit overpayments to a percentage of the amount owed such as 10% of the outstanding balance. They charge a fee if you overpay by more than the limit. On the other hand, if your mortgage is fully flexible you can overpay, safe in the knowledge you can borrow the money again in the event of an emergency.
If you’re paying your lender’s Standard Variable Rate (SVR), you can usually overpay by as much as you want. However, this type of deal is usually expensive. You are likely to be better off remortgaging to a more competitive rate.
If you do decide mortgage overpayments are right for you, simply contact your lender and explain that you want to make overpayments to reduce your mortgage term.
With most lenders, you’ll then be able to change your mortgage payment online and arrange for the higher amount to be taken by direct debit each month.
So, should you make mortgage overpayments?
But even if you have spare cash, and a mortgage product that allows you to overpay, it does not mean that you necessarily should. Overpaying your mortgage won’t be right for everyone so you’ll need to decide if it’s right for you.
Essentially, it will be cost effective to overpay on your mortgage if your home loan is at a higher interest rate than you can achieve on your savings. Returns on savings are low, but you might want to think about investing your spare cash. If the returns you enjoy from the stock market are greater than the savings you will make from overpayment, it might make more sense to invest rather than overpay.
Whether to overpay or to invest will depend on you and your financial and other circumstances, such as your age, income and your plans for the future plus of course what you owe on your mortgage. To get a clear view about the decision you need an independent expert to help you. At Continuum we are expert in all aspects of mortgage provision as well as financial management in general. This means we are the ideal source of the advice you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage products, or investment strategy 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.
While investing your capital is at risk.
Equity investments do not afford the same capital security as deposit accounts.