Taking a slightly different angle to the mortgage news that most people are reporting about people struggling to pay their mortgages and record high interest rates, we are going to talk in this blog about people who can afford to make mortgage overpayments on their current loans. And whether or not it makes sense to do it in this current economy.
What Are Mortgage Overpayments
When you get a mortgage you normally either fix your payments for a number of years, or you choose a loan that is variable and can change depending on national interest rates. People often choose to fix their mortgage payments as a way of guaranteeing a certain monthly payment. If it is arranged by a qualified and professional mortgage broker, this monthly payment is normally carefully calculated and determined by the borrower’s budget and what is comfortable for them per month. Most of these products will have a penalty attached to them that you will need to pay if you decide to terminate the mortgage before the agreed fixed period ends.
For variable rate mortgages or tracker mortgages, these payments are not fixed and can go up or down if interest rates in the UK change. For example a variable base rate tracker mortgage will track the Bank of England’s base rate and will normally add a further percentage premium on top. Something like BOEBR + 0.20%. If the base rate goes up, your monthly payments will go up. People choose this option because there are normally not any early repayment fees attached to them, so the flexibility of the loan is appealing. There is also the chance that if interest rates go down in the UK, your mortgage could become much cheaper. For example, if the base rate drops to 3% your mortgage would change to 3% + 0.20%.
When selecting a mortgage, you can arrange a product where overpayments are allowed too. Not all products will allow this, but many will allow you to pay up to 10% extra a year if you can afford to do so. People will often opt to do this to try and pay off their loan quicker. If you feel that you are able to pay extra on your mortgage, this is quite easy to do and your mortgage advisor will be able to tell you have to go about doing it.
Pros of Making Mortgage Overpayments
- We’ve already mentioned the main pro to making overpayments to you mortgage….but we will mention it again. You will pay off your mortgage quicker! The dream of every mortgage owner is to not own a mortgage anymore. And that is exactly what you will be proactively working towards. By making overpayments to you mortgage, not only will you reduce the balance of your loan quicker, but you will also reduce the length of time that you will ultimately have the loan for. A 25 year mortgage could reduce to 20 years of less depending on how much you can afford to pay off. If you are planning on keeping this property as a forever home, then you will build your equity month on month while your property hopefully increases in value and your mortgage reduces.
- If you are looking at building equity in a property and then selling and upsizing or upgrading to a more expensive property, then overpaying your mortgage will also be a huge benefit to you. The less mortgage you have outstanding, the more equity you will have when you eventually sell and the more deposit you can contribute to the new purchase.
- if you have a fixed mortgage, every 2 – 5 years you will need to remortgage on to another fixed product. Each product is normally assigned a specific loan to value. Meaning that the larger percentage of a property value that the mortgage covers, the higher the interest rate. For example, a 90% LTV mortgage might have a rate of 6% but a 60% LTV mortgage might be 4.5%. If you overpay your mortgage, paying down the loan and increasing your ownership, the lower your loan to value will be when you come to remortgage. As long as you aren’t looking to borrow any extra money.
Cons of Making Mortgage Overpayments
- As we’ve already mentioned before, a lot of mortgage products will have early repayment charges if you go over the allowed amount. If you have a diligent mortgage advisor to help you to secure your loan, you should be very aware of how much you are and aren’t allowed to overpay per month or per year. But, if you don’t know, you could be charged some hefty fines for paying too much off!
- We are living in a cost of living crisis at the moment. Everything is getting more expensive, so it is extremely important to make sure that your budget is exactly spot on. You may think that you can afford to make X amounts of overpayments, but it might not actually be the case. If you are thinking of paying extra on your mortgage, you should always discuss this with a mortgage advisor first. Not budgeting properly could mean that you overstretch your budget or overlook other important debts or monthly payments and you could end up in a worse place financially than you were before.
Speak To a Mortgage Advisor
Whether you are looking to buy a property, remortgage an existing property, or just want to know more about making overpayments to your current loan, you can always give our mortgage team a call. Our initial mortgage consultation chats are free of charge and you will have a one on one conversation with a qualified and experienced senior mortgage broker who will be able to answer any questions you have. Give us a call or send us an email today.