Even a small overpayment on your mortgage each month can save you a tidy sum in interest over the years. Here’s why it’s worth doing.
When you first take on a new mortgage, it’s natural that your main priority will be to ensure that you can meet the payments. Many of us think about what we have to pay and make sure we have the funds available. Few of us give any thought to making overpayments on our mortgage, which can save a considerable amount in interest over the years.
‘I’m passionate about ensuring all of my clients pay the lowest amount of interest on their mortgage – not just for the first two years of a fixed rate term but for the lifetime of their mortgage,’ says MB Associates’ Managing Director, Monica Bradley. ‘I always encourage clients to make overpayments if they can, to reduce the interest they have to pay. Even a small overpayment of £50 to £100 per month can significantly reduce the interest over time.’
Flexible overpayment facilities
The majority of lenders will allow flexible overpayment facilities, which means that, in most cases, you will be able to pay off more of your mortgage if you can afford to do so. ‘The vast majority of lenders will allow a borrower to overpay ten per cent of the outstanding balance of their mortgage each year,’ says MB Associates’ Sales Manager Phil Leivesley.
However, some lenders do have restrictions in place. Phil says: ‘They might require a minimum overpayment amount, for example, £1000, or they might not allow overpayments at all. It’s important to check your original mortgage offer document as this will reveal if and how to make overpayments.’
So long as your lender will allow you to make overpayments, it’s well worth looking into it and calculating an extra amount you could afford to pay. In the long-term, you could save a substantial sum. Similarly, if you are about to take out a new mortgage, ask your broker or lender if the payment terms are flexible so that you can overpay if you want to, even if it’s not likely to be affordable straight away.
Here are some examples based on a mortgage loan of £300,000 and an interest rate of 1.99% taken out over 30 years…
If you overpay by £50 per month, you will shorten the term of your mortgage to 28.6 years, saving you a total of £13,998 in interest.
If you overpay by £100 per month, you will shorten the term of your mortgage to 27.3 years, saving you a total of £26,327 in interest.
If you overpay by £200 per month, you will shorten the term of your mortgage to 24.9 years, saving you a total of £47,081 in interest.
If you overpay by £500 per month, you will shorten the term of your mortgage to 20 years, saving you £89,601 in interest.
As you can see, the shorter the term of your mortgage, the less you pay in interest.
Small amounts add up
Many people just don’t realise how much they could save until examples like this are given. Even a small overpayment of £50 per month could save you almost £14,000.
So how do you set up an overpayment? There are various methods. You can either contact your lender to make a one-off lump sum payment, which might be ideal if you’ve recently inherited some money or received a bonus at work.
Alternatively, you can simply request that your monthly payments are increased until you notify the lender otherwise. Another method is to ask your lender for their bank details and set up a regular standing order for the overpayment amount that’s affordable for you.
If it’s possible for you to make overpayments, even if it’s just a small amount each month, we highly recommend that you do it.