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Is this a good time to overpay my mortgage?

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·4-min read
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Is this a good time to overpay my mortgage?
'Borrowers with ‘spare’ cash in a bank account not earning much in the way of interest, may want to think about overpaying,' say the experts. Photo: Getty

If you’re one of the lucky individuals who managed to build up a pot of savings during lockdown — due to reduced spending on holidays, socialising, commuting and other costs — you may be wondering how best to make use of that money.

One option is to use those extra savings to overpay your mortgage.

Why might it make sense now?

At present, interest rates are at record low levels, which means savings rates are probably going to be lower than mortgage rates.

As a result, overpayments are likely to save you more in interest payments than you could earn in savings.

What are the benefits?

Overpaying your mortgage even by a small amount can have some big benefits.

Mark Harris from broker SPF Private Clients said: “Borrowers with ‘spare’ cash in a bank account not earning much in the way of interest, may want to think about overpaying. This enables you to reduce the interest you pay over the term of the loan, clearing the balance more quickly, and saving you money in the long run.”

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Mike Fagan, mortgage adviser at Manchester Money, added: “Not only will making overpayments reduce your mortgage balance faster — and therefore shorten the lifespan of your mortgage — but it will also potentially allow you to access lower interest rates more quickly then you would otherwise have been able to.”

Check the Ts and Cs

While this may sound appealing, it’s important to read your mortgage small print.

Typically, lenders will allow you to overpay by 10% of your home loan amount per year. However, any more than that will usually incur a penalty.

Joshua Gerstler, chartered financial planner from The Orchard Practice said: “Most lenders limit the overpayments to 10% of the outstanding balance each year, though some, such as Metro, may allow 20%.

“Most tracker mortgages will permit unlimited overpayments without a penalty. If you overpay more than the allowed amount, you will normally incur a charge of between 1% and 5% on the excess.”

Read more: Property: How to sell your home faster

As a borrower, you want to avoid a charge.

Harris said: “You need to check the terms of your home loan as it doesn’t make sense to try and save interest, but then end up overpaying too much — and being charged a penalty for doing so.”

Other things to think about

It’s also important not to overpay money you may need at a later date.

Imran Hussain from Harmony Financial Services, said: “Once you’ve made the overpayment, you don’t get that money back. This could leave you in a tricky situation, should an emergency occur, such as the boiler breaking down.”

With this in mind, it’s worth keeping six months’ worth of expenditure in an instant-access savings account as a “rainy day” fund for emergencies.

Iain Swatton from mortgage platform, Dashly.com, said: “It’s vital to have access to an emergency savings reserve in case of an unexpected event. You should look to build this up before thinking about making overpayments.”

Repay more expensive debts first

Also remember that if you have other debts, such as credit cards, an overdraft or loans, these are likely to have a higher rate of interest. If this is the case, it makes sense to clear these debts first, before overpaying on your mortgage.

Don’t forget to consider other options, too

While there’s a persuasive case for overpaying your home loan right now, there’s also an argument that it might not be the best time to do so.

Rob Peters from Simple Fast Mortgage, said: “Another view might be that, because interest rates are so low, it doesn’t make sense to reduce the mortgage debt because it’s ‘cheap borrowing.’ Someone holding that view might be thinking about investing for longer-term capital growth or income instead.”

Read more: How much can I borrow on a mortgage based on my salary?

This is a view shared by Gerstler, who added: “With mortgage rates so low, the chances are you could earn more on the money by investing it than you will save from mortgage overpayments.”

The key is to make the right decision based on your individual circumstances — and financial goals.

Watch: How does the 95% mortgage scheme work?

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