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Getting a mortgage is probably the most significant amount of borrowing that most people take on, and although varied depending on the length of the mortgage and the interest applied, the amount that we end up having to pay back is usually vastly more than the amount borrowed.
If you have a mortgage, one of the best and simplest ways to save a lot of money in the long run is to make overpayments.
Overpaying simply means that you make extra payments on top of your monthly mortgage payments. These overpayments don’t have to be made monthly and can often be paid on an ad-hoc basis.
If you can afford to, overpaying on your mortgage can literally save you thousands of pounds.
Check out our savings calculator by inputting your mortgage details to see how much overpaying could save you over the life of your mortgage. (The calculator shows savings based on reducing the term).
Your result will appear here
Saving indicated assumes monthly repayments stay the same
You can see how overpaying, even smaller amounts, can make a huge difference to the amount paid back overall. You can overpay to reduce the term of your mortgage, which also saves the interest you would have paid on that amount, or you can overpay to reduce the monthly repayments. You want to reduce the overall term where possible to make the biggest savings.
Can everybody overpay on their mortgage?
Different mortgage providers will have terms that dictate how much, if anything, you are allowed to overpay, but it’s quite common for most mortgages to accept overpayments for up to 10% of the outstanding balance in a year. You’ll need to find out the terms of your individual mortgage.
Check you can overpay without penalty or charges
The first thing to check is if your mortgage will apply any penalties or fees for overpaying. Some do and some don’t. You should also check if there’s a minimum amount that you can overpay at any given time, this is common, and might be a sizeable amount, for example £500.
Find out how much you can overpay
The next things to find out is how much your specific mortgage will allow you to overpay. Like I mentioned before, up to 10% is common, but this will be specific to your mortgage.
Work out if you can afford to overpay and how much
You’ve probably already got a budget worked out, or a good idea of your income and outgoings, so it’s worth looking in depth at these and seeing where, if anywhere you can make savings, or have any spare money.
If you haven’t already worked out a budget, you can use our handy budget calculator in this post to create one.
Why overpaying earlier in the mortgage saves you more money
Regardless of whether you overpay to reduce the term or repayments, the earlier you can start overpaying on your mortgage, the more money you will save over all. This is because of the compound effect.
How savings can be compounded
Let’s say that you pay off £500, your monthly repayment might drop by say £2.50 a month. If you save that £2.50, and the next year pay off another £500 plus the £30 you’ve saved, then your mortgage repayments would drop again, and this year you’d be saving £5 plus that 30p extra.
Let’s take this example again, assuming an interest rate of 2%, but say you can manage to overpay £2000. Say this causes your monthly repayments to drop by £10, you can then save that £10 monthly. If you can save another £2000 to overpay the next year, plus your extra £10 savings you can now overpay 2120. Now your mortgage repayments drop by even more and you can save even more. So you can see how the savings compound year on year.
Also, when you come to re-mortgage, having made overpayments might mean that you now have a better loan to value ratio. So you may find you can then get a better mortgage rate, thus saving even more.
Is overpaying your mortgage right for everyone?
Usually, mortgage interest rates are higher than the rates you’d get for having your money in savings, especially at the moment with interest rates on savings being generally low. However, if you can save money with a higher rate of interest than you have on your mortgage, then overpaying may not be your best option.
Also, as most mortgages don’t allow you to take the money back once you’ve overpaid, it’s worth considering having some savings set aside for an emergency fund before you overpay.