Overpaying your mortgage is a great way to not only save thousands but also to help you become mortgage free years before your current mortgage payment schedule aims for. Here we look at some of the things to consider if you’re thinking about starting to over pay your mortgage.
Consistency is key
Unless you’re earning big, big money paying off a mortgage is a long process. By overpaying your mortgage you can save thousands as well as significantly reducing the time it take to pay off your loan. However you’re still going to need a bit of patience. Reaping the benefits of over payments is a gradual process that will take a period of months to years to benefit you. Be prepared to be consistent with your efforts to overpay.
Redemption Penalties
Many mortgages have what they call redemption penalties which are subtly different from repayment penalties. Check with your mortgage provider but they usually mean you’ll be charged a fee if you repay all of your mortgage loan within a specified time frame. You’ll be charged this fee whether you are remortgaging to a different provider or paying off your loan in full and going mortgage free.
Mortgage Overpayments
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For this reason it may be worth not repaying your mortgage completely If you’ve been overpaying and are nearly mortgage fee it may be worth leaving a small balance (a single pound or dollar will do) to avoid these repayment charges.
Repayment Penalties
Many mortgages have a restrictions on how much you can overpay each year. A common figure is 10% of the outstanding balance. Overpay more than this in a year and you may have additional fees to pay. Be sure to check the details of your mortgage agreement before embarking on over payments.
Pay off expensive debts first
Overpaying your mortgage and being mortgage free in a few years time can be an exciting prospect. However before embarking on an over payment spree, in order to maximize the benefit of your money, be sure to pay off more expensive debts first. Debt such as credit cards, store cards, personal loans will almost certainly be charging higher rates of interest than your mortgage. To ensure you get the biggest bang for your buck be sure to pay these off first.
Every little helps
Paying off a 25 year mortgage can be a daunting prospect however you should remember the snaowball effect created by compounded interest. Every payment you make is a combination of interest and capital repayment. The more you can reduce the capital (by overpaying this month) the less interest you’ll be charged next month.
Mortgage Overpayment Table
Making say a £50 overpayment may not seem a lot on a loan of say £100,000 but do it every month and the effects soon add up as you can see in the table below. On a £100,000 loan if you made no over payments you’d pay £75,377 in interest by the time you’d paid the loan off.
If you can manage to overpay £50 each month you’ll end up paying off the mortage 2 and a half years early and save a whopping £7,319 in interest payments. Make the overpayments £200 per month and you’ll have the mortgage paid off nearly 7 and a half years early and save over £20,000 in interest.
Don’t Neglect Savings
You never know wghat is round the corner – the car breaking down, emergency repair at home, expensive medical fees. On most mortgages (the exception being offset loans) once you’ve made an overpayment you won’t be able to take the money back out if you need it for an emergency (home repair, new car etc). As a result you’ll need to be prudent and ensure that you can afford to make over payments.
One way to build a safety net is to ensure you have an emergency savings pot of cash set aside. Don’t neglect your savings regime in order to increase your over payments.
Summary
In this post we’ve covered some things to bear in mind when thinking about over paying your home mortgage loan. Now you’re raring to go take a look at our other mortgage over paying tips to make sure you give yourself the best possible start. Good luck!