If you have spare money available, you might be wondering about overpaying on your mortgage. Doing so will make a dent in your debt, and could result in you paying the loan off more quickly.
Though, overpaying your mortgage may not always be the sensible choice, as there may be more pressing or sensible ways you can make the most of your cash.
If you have some spare cash and you’re wondering what the best way is to use it, continue reading to discover the benefits and downsides of overpaying your mortgage.
The benefits of overpaying your mortgage
You’ll pay off your mortgage quicker
Perhaps one of the most glaring benefits of overpaying your mortgage is that you’ll be more likely to pay off your debt quicker.
For instance, Nationwide’s mortgage overpayment calculator shows that if you had a 20-year £200,000 capital and interest mortgage with a 2.5% interest rate, you could reduce your mortgage’s lifespan by two years and two months if you increased your monthly repayments by £100.
You could save money overall on interest payments
As well as potentially paying it off quicker, another great reason to overpay your mortgage is that you could save a significant amount of money in interest payments.
Using the above example, if you overpaid by just £100 a month, then you would pay £6,291 less interest over the full course of your mortgage.
You could save more money in interest payments than you would from holding the cash
Throughout your life, your mortgage is likely going to be one of your largest financial commitments, and due to the size of the debt, interest can quickly add up. This is why you could end up saving a considerable sum of money when you pay it off quicker.
If the interest rate you’re paying on your debt is higher than the rate you are receiving on your savings, it can make financial sense to clear the debt sooner – although there may be reasons to maintain some savings as you will read below.
You’ll own your home sooner
You may also find that the less time it takes you to pay off your mortgage, the quicker you’ll actually own your home.
This can lift a weight off your shoulders and give you the peace of mind that you don’t have debts hanging over your head and that you own your property outright.
You could mitigate further interest rate rises
If the Bank of England base rate rises further, there’s a good chance your mortgage repayment rate could rise if you’re not on a fixed-rate deal.
So, by overpaying your mortgage and reducing the balance, you may find that any rise to your mortgage repayments is easier to manage.
The downsides of overpaying your mortgage
While overpaying your mortgage does come with several benefits, there are a few key things worth taking note of before doing so.
Your money may be better off in an emergency fund
Over the past year, there has been a rise in the cost of living across the UK. In fact, the Office for National Statistics reports that the Consumer Prices Index rose by 10.1% in the 12 months leading to January 2023.
These higher costs can often make you more financially vulnerable so, before you overpay your mortgage, you may want to build your financial resilience by creating an emergency fund.
Having a cash reserve can help you deal with any unexpected financial problems that may arise, giving you the peace of mind that you have a safety net when you really need it.
If you’ve committed this money to your mortgage by overpaying, you may find yourself in a tough situation later on.
You could potentially save more by paying off other debts first
As mentioned, overpaying your mortgage can save you money in the long run, although you might be able to make greater savings by paying off other debts first.
For example, some debts, such as credit cards, tend to charge higher interest rates. In fact, This is Money states that the average cost of borrowing on a credit card recently hit 30.3%, the highest for 16 years.
At such a high rate, any credit card debts you have can quickly accrue interest and turn into a considerable sum of money.
This is why it may be prudent to settle other high interest debts before you consider overpaying your mortgage.
You could face an early repayment charge
Another important thing to keep in mind about overpaying your mortgage is that some lenders have a limit on the amount you can overpay each year. This is likely to be particularly true if you’re on a fixed- or discounted-variable rate deal.
If you go over this limit, then you could incur an early repayment charge that could, in turn, erode any savings you would make by paying off your mortgage early.
This limit tends to be around 10% of your remaining mortgage balance. For instance, if you had £100,000 debt remaining, most lenders would allow you to overpay by £10,000 without incurring a charge.
This limit varies between lenders, which is why you should ideally review the terms and conditions of your mortgage before overpaying.
Money spent on mortgage overpayments is illiquid
When you overpay your mortgage, you will normally commit the money you’re paying. To get it back, you’d likely need to remortgage your property, which can take time and money.
Meanwhile, other uses for your money, such as investments, tend to be far more liquid and your money is more readily available. You can control how your money is invested, and even change the course of them if you feel your money would be better off somewhere else.
Of course, this can’t be done when you overpay your mortgage instead.
You could be better off investing the money instead
If you are considering putting money aside for the long term, the returns from investing could be greater than the interest you save by overpaying your mortgage.
In fact, this could enable you to pay a bigger lump sum from your mortgage at some point in the future.
Remember that 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.
Get in touch
With so much market uncertainty lately, it can be tricky to figure out whether overpaying your mortgage or investing would better suit you.
If you would like some help, please email enquire@london-money.co.uk or call (0207) 808 4120 to find out how we could help.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Investments carry risk. 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.