Mortgage Overpayments: Should You Pay Off Your Mortgage Early or Save the Money?
For many homeowners, making mortgage overpayments can seem like an obvious way to reduce their debt. Paying off your mortgage sooner could mean paying less interest overall and becoming mortgage-free earlier.
However, putting extra money towards your mortgage isn’t necessarily the right option for everyone. Depending on your mortgage rate, savings rate and personal circumstances, you may be better off keeping the money in savings or considering other ways to use it.
Should you make mortgage overpayments?
The main benefit of overpaying is straightforward: reducing your mortgage balance means you pay interest on a smaller amount. Over time, this can reduce the total amount of interest you pay and potentially shorten your mortgage term.
If you have spare money each month, making regular overpayments could gradually reduce your outstanding balance. A lump-sum payment can also make a significant difference, particularly if you still have many years remaining on your mortgage.
However, it’s important to check your mortgage terms before making an overpayment.
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Check your mortgage’s overpayment limits
Many mortgage lenders allow borrowers to make overpayments up to a certain amount each year without a penalty. A common limit is 10% of the outstanding mortgage balance, although this varies between lenders and products.
If you exceed your permitted amount, you could face an Early Repayment Charge (ERC), which could reduce or even outweigh the financial benefit of making the overpayment.
Always check your mortgage paperwork or speak to your lender before making a large payment.
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Would you be better off saving?
Another option is to put your spare money into a savings account. If you can earn a higher rate of interest on your savings than the interest rate you’re paying on your mortgage, keeping the money in savings could potentially make more financial sense.
A higher-interest savings account can also give you access to your money if your circumstances change.
This is particularly important if you don’t already have an emergency fund. Having money available for unexpected expenses can provide valuable financial security, rather than putting every spare pound into your property.
Can overpaying help when you remortgage?
Reducing your mortgage balance could also help improve your loan-to-value (LTV) ratio. A lower LTV can potentially give you access to a wider range of mortgage products when you come to remortgage, depending on the lender and your circumstances.
It’s worth considering your mortgage as part of your wider financial picture rather than simply asking whether you should pay it off as quickly as possible.
So, should you overpay on your mortgage?
There isn’t a one-size-fits-all answer. Overpaying can be an effective way to reduce interest and become mortgage free sooner, but maintaining accessible savings and considering other financial priorities are equally important.
Before making a decision, check your mortgage’s overpayment limits, any potential ERCs, your current mortgage rate and the return available on savings.
Book a mortgage review
If you’re unsure whether overpaying could be right for you, a mortgage review can help you understand your options and how your current mortgage fits into your wider financial plans.
At Expert Financial, we make the remortgage and mortgage review process as simple and straightforward as possible. Our independent mortgage advisers compare suitable options based on your current situation and help you decide on your next best step with confidence.
Book a mortgage review today and speak with one of our experienced advisers about how we can help you make informed decisions for the future.
