The first question many home owners ask is: 'are mortgage overpayments always the right thing to do', or 'should I overpay my mortgage?' The short answer is 'yes', with some exceptions. Find out all the whys, whens, and hows of mortgage overpayment below.
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Should I overpay my mortgage – and why?
In most cases, yes. Overpaying your mortgage whenever possible is a sound financial decision, because overpaying reduces the overall amount you owe on your home, and therefore the total amount of interest you will have paid. You don't pay interest on the money you overpay on your mortgage, so overall you'll be paying less. So, if you have cash to spare and are trying to decide between overpaying your mortgage and just putting it in savings, then overpaying makes more sense right now, given that interest rates on savings are much lower than the interest rates you pay on your mortgage.
How much can I overpay?
As a general rule, lenders will allow overpayments of up to 10 per cent of your current mortgage balance per year, but this is not a guarantee. Most will let you overpay while you are still within your fixed-rate introductory offer, but some will start charging you for overpayments after the first two years, say, or the first five years if you're on a longer-term fixed-rate mortgage.
The percentage the lender will charge you on your overpayment will vary, but is often calculated as the number of years left on your current mortgage deal. For example, if you're three years into a 10-year mortgage deal and you decide to overpay, you could get charged seven per cent on that overpayment.
Other lenders still will just charge you a flat fee for overpayments no matter how long you've got left with them, so it's very important to read the small print on mortgage overpayments before you go with any lender.
Should I use my savings to overpay my mortgage?
Yes, but only if your savings account is already in good shape and you've reached your tax-free allowance for the year. This is the only circumstance when overpaying your mortgage with what would be savings is a good idea.
Don't use your emergency savings pot to overpay your mortgage: now that you are a homeowner, you will inevitably encounter house-related emergencies, such as broken boilers. You will need cash savings for these.
Should I overpay my mortgage if I have credit card debt?
Absolutely not: credit card debt and short-term loans are more expensive than a mortgage, always. Repay those first before even considering making mortgage overpayments.
When you shouldn't overpay your mortgage
They key situations when overpaying your mortgage is not a good idea are:
- You have existing credit card debt: you will be worse off overpaying than repaying the higher interest-rate loans on your credit cards.
- You have an offset mortgage: Offset mortgages are a bit different from standard mortgages in that they allow you to overpay and then withdraw the money again should you need it, without paying anything extra.
- You don't have any savings: as a homeowner, you need at least some savings to pay for emergencies; you don't want to rely on a credit card for a huge payment, so save up instead of/before overpaying.
Finished your fixed term? It's probably wiser to remortgage than to overpay. Use the handy tool below to find the best deal for you.