You’ve decided on your dream home, you’ve paid the deposit, and you may even have been living in it for a few years – so what do you do now?
You may think nothing of your monthly mortgage payment; it may simply be another bill that gets paid with all the rest. But could overpaying your mortgage help both you and your finances?
For some people, it can be the perfect opportunity to improve your financial security going forward.
Since interest rates are currently at record lows, your money probably isn’t growing much while in your savings accounts. For several months, the Bank of England base rate has sat at just 0.1%. This means that if you deposited £1,000 in a 0.1% interest rate savings account for a year, you would end up with just £1,001.
As your savings may not be building up over time, and are likely losing their value due to inflation, overpaying your mortgage might be a useful decision.
A typical mortgage term is 25 years and although the amount you owe will reduce over time, you’ll continue to pay interest on the remaining amount throughout the entire mortgage term. This means that the faster you pay it off, the more money you could save on future interest payments.
Read on to find out more about overpaying your mortgage and if it is the right decision for you.
Overpaying your mortgage could save you money in the long term
There are a few different reasons why overpaying your mortgage might be the right decision for you.
The first thing to consider is whether your mortgage rate or savings interest rate is higher. If the former is greater than the latter, then it may make sense to overpay.
By overpaying your mortgage, you could save money by reducing the total amount that you owe, so interest on the loan grows more slowly. It also has the added bonus of reducing the amount of time it will take to repay your mortgage.
The length, rate, and monthly payments of each mortgage can vary significantly, but it’s likely that the interest rate on your mortgage will be higher than the rate on your savings. If this is the case, your mortgage will be costing you more than your savings are earning in the long run.
Paying your mortgage off sooner can give you a greater sense of financial security
If you overpay your mortgage, you could significantly reduce how long it takes to pay it back. Knowing that you’re closer to the end goal of finally paying it off can help to give you greater peace of mind.
Once you have made the final payment and you’re rid of one of the largest debts in life, you’ll probably feel a strong sense of relief.
Although this sounds great so far, there can be some reasons why overpaying may not be the right decision for you.
Overpaying your mortgage might not be the right decision for everyone
Before you think about overpaying, there are a few things to consider. First, you may want to use any surplus cash to build up an emergency fund, if you haven’t already got one. This can be useful for gaining more financial stability, as it can be useful for ensuring you can pay your bills if you ever experience a financial disruption.
Experts typically recommend that an emergency fund should consist of a minimum of three months’ worth of essential expenses. This will allow you to cover your outgoings for a short while if you were to lose your income. Alternatively, you can use it to cover unexpected costs, such as a boiler breakdown.
Another consideration is whether you have other outstanding debts to pay, as it may be worth paying these off before increasing your mortgage payments. Although these debts may be smaller than your mortgage, they will continue to build interest if they are left unpaid.
The sooner you settle smaller debts, the sooner you can start saving money or direct funds to pay off larger debts, such as your mortgage.
You should also check if your mortgage provider has any early repayment charges. Some lenders will let you pay up to 10% of your remaining balance each year without incurring an extra charge, but this isn’t a rule.
It’s important to make sure you understand the limits surrounding your mortgage so that you aren’t hit with an unexpected bill.
Your mortgage isn’t like a savings account
Your mortgage isn’t a savings account where you can deposit money and freely access it later. Any money paid into your mortgage will be incredibly difficult, if not impossible, to get back.
If an unexpected payment arises after you’ve already overpaid your mortgage, you cannot cover it with the money you used for the overpayment. This is another reason why it’s important to consider holding an emergency fund.
Lastly, mortgage rates are currently at very low levels, with the Guardian reporting that multiple lenders are currently offering sub 1% rates. As such, you may be able to achieve better returns by investing on the stock market, especially if you’re investing over a long period.
Investing into the stock market offers the potential for your savings to grow more than they would if left in a savings account.
If you’re comfortable making your monthly mortgage repayments, you may find it more profitable to invest any spare cash you have instead of overpaying your mortgage.
The typical length of a mortgage could be anywhere between 20 and 35 years, which provides plenty of time for an investment to potentially grow on the stock market. Online investment manager Nutmeg found that, using market data between 1971 and 2020, investing for 10 years or more gives you a 94% chance of making a profit.
However, investing money in stocks and shares doesn’t come without risks and it’s important to remember that the value of your investment can go down, as well as up.
Overpaying your mortgage could help you in the future, but only if you’re prepared now
If you’re in a financial situation that comfortably allows you to overpay your mortgage it could be worth considering. Not only for the financial security and savings it could provide in the future, but also for the emotional benefits of knowing that you are close to finalising what is likely to be the largest payment of your life.
However, given the current mortgage and interest rate climate, ensuring that you have a fully topped up emergency fund may take precedence, especially as it can be very difficult to get an overpayment back.
Whatever you decide should be tailored to your own personal situation, so consider contacting a financial adviser to help you through the process. Reach out to us for some personalised assistance on your situation, and a rundown on what we believe could be the best course of action for you.
Get in touch
If you want to know whether overpaying your mortgage is right for you, get in touch. Email email@example.com or call us at 0207 808 4120 to find out more.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
The value of your investment 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.