If you’ve got a little spare money at the end of every month, what’s the best way to use it? Should you put it towards overpaying your mortgage or would a different option make more sense?
Most people taking out a mortgage choose a repayment option. Assuming you keep up with your repayments, you’ll own the property outright at the end of the term. It’s a milestone many families look forward to, so if you’ve got some extra cash, you might consider overpaying to get there sooner.
However, there are other ways to use the additional money, such as saving or investing. So, which option is the right one for you? There isn’t a universal answer; the right choice will depend on a range of factors. Read on to discover the pros and cons of overpaying your mortgage.
3 benefits of overpaying your mortgage
1. You’ll be mortgage-free sooner
Becoming mortgage-free sooner is one of the most common motivators for overpaying a mortgage.
Mortgages are often one of your largest financial commitments, so clearing it could offer a sense of security and relief. In addition, without repayments you could enjoy greater financial freedom. You might increase your disposable income to spend more on the things you enjoy or calculate whether you’re now able to retire earlier.
2. You could pay less interest overall
If you have a repayment mortgage, your repayments will be used to pay off a portion of the debt and the interest accrued. When you overpay, all of the money will be used to reduce the debt.
As interest is calculated based on the remaining balance of the mortgage, overpaying could save you thousands of pounds over the full mortgage term.
Imagine you have a repayment mortgage of £200,000 with a 15-year term and an interest rate of 4%. Your regular repayment would be around £1,480, and you’d pay more than £66,000 in interest over the full term.
If you made monthly overpayments of £200, you’d be mortgage-free two years and four months earlier. You’d also save more than £11,000 in interest alone.
3. You won’t be exposed to investment risk
One of the alternative options to overpaying is investing your spare money. While this has the potential to deliver returns, it also means exposing your money to risk, as investment returns cannot be guaranteed. In contrast, you can calculate how overpaying will affect your finances.
3 drawbacks of overpaying your mortgage
1. Your money will be inaccessible
Once your money has been used to overpay your mortgage, it’s generally difficult to access the money again. Usually, you’d need to remortgage or take out additional borrowing to do so.
As a result, if you want flexibility, overpaying might not be right for you. Instead, holding the money in a savings account, where you can withdraw it if needed, could be valuable.
If you do choose a savings account, review the interest your money is earning. Switching to a different provider could mean your money works harder.
2. You could miss out on other opportunities
Choosing to overpay your mortgage could mean you’re unable to invest elsewhere. Historically, investment markets have delivered higher average returns than the typical mortgage interest rate. As a result, it could provide a way to build your wealth, especially if the interest rate you pay is low.
However, investment returns cannot be guaranteed and you may get back less than you initially invested. Past performance is not a reliable indicator of future performance.
3. You might pay an early repayment charge
If you have a mortgage deal in place, there might be restrictions on how much you can overpay before a fee applies.
Usually, you can overpay up to 10% of the outstanding mortgage balance each year before you face an early repayment charge. However, this may vary, so it’s important to check your mortgage terms, particularly if you want to make a substantial overpayment.
Get in touch
Ultimately, whether overpaying your mortgage is the right decision for you will depend on your circumstances and what your goals are. If you have any questions about your mortgage, please get in touch.
Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
