Why Overpay Your Mortgage?
Well put simply overpaying your mortgage is one of the most effective things you can do with your money. Too often people with mortgages look for ways to invest their spare cash such as building up large savings deposits. While this is by no means a bad financial strategy, few people realize the huge financial benefits that arise from overpaying their mortgage.
Save Thousands of Pounds
Perhaps the biggest benefit to be had from overpaying your mortgage is that you can easily save literally thousands of pounds. With very little effort each month you can save yourself huge sums of money in the long run.
Making regular mortgage over payments is the most efficient and effective way to pay off your mortgage early. Assuming you have a capital repayment mortgage each monthly payment you make will be partially interest and partially paying off the initial mortgage loan (often called the principal or capital amount). If you can make a regular overpayment each month, the additional money will go directly toward paying off the principal or capital part. This will mean that the amount of interest you will have to pay in the future will reduce.
Lets take a look at an example to see how this works.
Value of Mortgage Loan: £100,000
Interest Rate: 5%
Term: 25 years
Regular Monthly Repayment: £585
Monthly Overpayment: £50
Total Saving: £12,000!
In the above scenario if you just made the regular repayments you would end up paying back a total of £175,377: £100,000 of the original loan plus £63,124 in interest over the 25 years. By making a £50 overpayment on this mortgage each month would mean you only end up paying a total of £163,124 (a saving of over £12,000). In addition the mortgage would be fully paid off 4.5 years earlier (after 21 years instead of 25).
You can see from the above example the huge impact a small regular overpayment has on your mortgage and the total amount of interest you end up paying over the full term of the mortgage. If you were to pay £100 extra each month instead of £50, you would save a whopping total of £21,000 while managing to pay of your mortgage 6.5 years early.
Overpaying Your Mortgage Saves Time
As you can see in the above example overpaying your mortgage will usually mean you end up paying back your mortgage many years sooner than scheduled. This could allow you to retire sooner than planned or will boost your disposable income as you will be able to live rent/mortgage free.
You might decide once you have paid off you home mortgage early that you want to invest in a holiday home. Now that you have no mortgage to pay you should be able to buy and pay off such a holiday home far easier than if you were still paying off you residential mortgage loan!
How to overpay your mortgage?
Well the key as you can see above is to think small rather than not at all. Paying off a mortgage loan over 25 years can seem daunting however you can see above what a difference overpaying a small monthly amount such as £50 can make. So where can you find that £50? Below are some simple ideas to help you find extra cash to put towards your mortgage each month.
# Try making coffee at home instead of stopping off at the coffee shop each morning
Possible Monthly saving: £30
# Every other day place the loose change from your purse or pocket into a jar and
Possible Monthly Saving: £15
# Take a packed lunch to work each day instead of eating out
Possible Monthly Saving: £35
# Quit smoking (if you haven’t already!)
Possible Monthly Saving: £40
# Ditch that gym membership you no longer use and go jogging in the fresh air instead
Possible Monthly Saving: £35
The above are just a few possible ways you could save some extra money each month to help you pay off your mortgage early. In reality there are a million and one ways to help you find a little extra cash each month to help you overpay your mortgage.
When To Overpay Your Mortgage?
Well ideally you should be making over payment on your mortgage every month. However before doing so you should make sure you check the terms of your mortgage. Some mortgages restrict how often and how large any over payments can be. With some mortgages you will incur redemption penalties if you overpay too much or too often.
As discussed above the most efficient way to get the maximum benefit from your over payments is to make regular monthly repayments. Doing so ensures that you reduce the future interest charges you will face by as much as is possible.
In addition to regular payments another great way to overpay is to use any financial windfalls you receive to make additional one off over payments. Next time you receive a tax refund, small inheritance, lottery win or work bonus consider making a one off overpayment. Paying off large sums towards you mortgage will of course further help you reduce the amount of interest you pay on your mortgage loan in the future.
Another thing not to forget…
Of course all of this assumes you are on the best possible mortgage deal you can get in the first place. You could easily save even more money by simply ensuring you are on the best possible deal. If you are unsure if you are then the first step you should take may be to look into remortgaging to a better loan deal.