Overpaying Your Mortgage: Because Owning a Home Shouldn’t Be a Lifetime Sentence!
Buying a house is one of the biggest investments most people will make in their lifetime. Mortgages are one of the most popular ways to finance this investment, but it is important to understand how they work and how to manage them effectively. One way to do this to think about overpaying your mortgage. In this post, we will take a look at what it means to overpay your mortgage, how it works and whether it is better than saving.
What is overpaying your mortgage?
Overpaying your mortgage means paying more than the minimum required monthly payment. If you have to pay £570 a month, for example, you may consider rounding it up to £600 a month. This mortgage overpayment goes towards paying off the principal loan (the amount you borrowed), which means in the long run, you will end up paying less interest – and that is always a win, right?
Overpaying can help to save you thousands of pounds in interest over the lifetime of your mortgage, and it can help you to pay off your mortgage faster. Why not try out an online mortgage overpayment calculator to see how it might work for you? Remember, it is important to check with your mortgage lender before making any overpayments to make sure there are no hidden penalties for overpaying.
What are the benefits of overpaying your mortgage?
If you have a bit of extra cash, making mortgage overpayments can be a good thing. Here’s why:
First of all, paying more than the minimum amount each month could mean you become mortgage-free earlier than you initially planned. You will be chipping away at the amount you borrowed quicker than expected, which can be a real game changer.
Secondly, as we mentioned briefly above, by shortening the length of time it takes to pay off your mortgage, you will reduce the total amount of interest you pay over the lifetime of your loan. That means more money in your pocket for other things, like saving up for a rainy day.
Thirdly, when you overpay on your mortgage, the amount of interest you pay each month is calculated on the outstanding balance of your loan. So, if you overpay now and interest rates go up later, you will be charged interest on a smaller amount, potentially saving you even more money in the long run.
Fourthly, paying off more of your mortgage sooner could also increase the equity in your home. This means your loan-to-value ratio (LTV) will decrease, which can make it easier to access better mortgage rates if you decide to remortgage in the future.
Finally, overpaying on your mortgage can be really flexible. Depending on your lender, you may be able to make overpayments as and when you like, or even set up regular overpayments through an online portal or app. This means you can tailor your mortgage payments to suit your own circumstances, whether that means paying more one month or skipping overpayments during a leaner period.
What are the potential drawbacks to overpaying your mortgage?
While overpaying your mortgage can be a smart move, there are some potential downsides to keep in mind. First off, it is important to make sure you have enough cash on hand for emergencies. If you overpay your mortgage but don’t have any savings, you may end up having to borrow money at a higher interest rate if unexpected expenses come up.
Additionally, if you are overpaying your mortgage while neglecting other debts, you may end up doing some serious damage to your credit score. This, in turn, can make it much harder to get approved for future loans or credit cards. It can even stop you taking out mobile phone contracts.
Finally, if you are tying too much cash to your mortgage, you may miss out on other investment opportunities that could offer higher returns.
Is overpaying your mortgage better than saving?
If the interest rate on your savings account is higher than the interest rate on your mortgage, it might make more sense to put any extra cash you have into savings rather than overpaying your mortgage.
Alternatively, investing your money or increasing your contributions to a pension plan could also be smart financial moves to think about.
It is always a good idea to weigh up your options and seek advice from a mortgage advisor, as well as speaking to your mortgage provider before making any big decisions. At Hudson Rose, we have a wealth of experience in dealing with all types of mortgages. Our approach is relaxed and even fun (!) but our advice is professional and tailored to your individual needs. Give us a call today on 0330 122 9920, or click here to book a chat with one of our advisors we’d love to help you on your mortgage journey!
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