Putting rising
interest rates to one side (easier said than done) and ignoring the doom and
gloom news we’ve been exposed to over the last few months, it’s time to talk
about mortgage overpayments.
What are they? Are
they a good or bad thing?
In this
four-minute read, we explain the ins and outs of overpayments.
(Note: This isn’t
financial advice, and if you’re thinking about making overpayments you should
speak to your lender or a financial adviser in the first instance.)
What is a
mortgage overpayment?
In simple terms,
it’s paying more than your contracted monthly mortgage payment. So, if you have
a mortgage of £1,500 per month, and you pay £2,000, you’ve made a £500
overpayment. Simples.
You can make a
one-off lump sum payment or regular overpayments.
Can you make
overpayments on any mortgage?
Some lenders are
happy for you to make as many overpayments as you like, whilst others may cap
the annual overpayment percentage. It’s important to find out what category
your mortgage falls into, as you could be charged a penalty for going over the
limit.
The benefits of
overpaying a mortgage might not be as great if you have an interest-only deal.
If you have a repayment mortgage (where you’re paying the capital and interest)
then overpayments will reduce the mortgage balance (i.e. the loan on the
property itself). With an interest-only mortgage, overpayments reduce your
future interest payments, however, you’ll still owe the original sum you
borrowed to purchase the property.
What are the
benefits of overpayments?
An overpayment now
means you’re saving money in the future, as you’re effectively reducing the
debt and the interest on the amount you borrowed to buy your property. So, as
the big supermarket says: every little helps.
By making
overpayments, you’re also increasing the equity in your home as you’ll own more
of it than you would by making your contracted monthly payment. And every
overpayment is a tiny step closer to being mortgage-free.
What are the
disadvantages of overpayments?
It may mean you
have less cash to hand for that rainy day. By using your savings to overpay a
mortgage you could leave yourself financially vulnerable if something
unexpected occurs, such as job loss or illness.
Other debts you
might have (such as credit cards) are far more expensive, so it makes more
sense to pay them off before considering mortgage overpayments.
If you’re
considering making an overpayment, always speak to an expert first. They can
help you decide what the best course of action is for your individual financial
situation.
At Ridgewater
Sales and Lettings, we can’t promise you a cheap mortgage deal, but
we can promise to help you sell your property. Get in touch on 01803 313 577 if
you want to sell your home.