When you’ve finally bought your own home after years of saving a deposit, you may feel as though you’ve ‘made it’. After all, from turning down nights out and takeaways to avoiding ASOS and Missguided like the plague, you probably had to make a huge number of sacrifices to save enough to become a homeowner. There’s probably nothing more you want than to put your feet up, enjoy your new home and splash your spare cash in a way you couldn’t before.
Now that I’ve got my own place, I’ve loved spending money on wall art, fancy cushions, and different types of booze for my very own mini bar. However, having clearly become addicted to saving money over the last few years, there’s a part of me that is keen to take on a few new financially sensible challenges so that I can make my future as financially comfortable as possible.
Paying into my workplace pension is one thing I’ve felt inspired to do, but another thing I’m doing is overpaying on my mortgage.
If you have no idea what mortgage overpayments are, read on my dear pal because I’m about to break it down for you.
What are mortgage overpayments?
As a mortgage holder, your lender will have calculated your monthly mortgage repayments based on the amount you’ve borrowed, the term of your mortgage and the interest rate.
When you make a mortgage overpayment, this means you give your lender more money than they’ve asked for.
What are the benefits of making mortgage overpayments?
When you overpay on your mortgage, there are two key benefits:
- you’ll reduce the amount of interest you pay overall
- you’ll pay off your mortgage debt sooner
Another benefit that people don’t often talk about is the fact that overpaying on your mortgage just. feels. good. You feel super sensible. You feel dead clever. You feel like the school swot, the teacher’s pet, the conscientious nerd with their hand constantly waving in the air.
How much can I save by overpaying my mortgage?
The amount you’ll save in interest will depend on a number of things such as:
- the amount of mortgage debt you have
- your interest rate
- the length of your mortgage
Money Saving Expert has a really helpful overpayment calculator that lets you work out how much money you could save. It’s really motivating to type in your mortgage details and see the numbers for yourself. Here are a few examples:
If you have a £100,000 mortgage over a 25-year period with an interest rate of 6%, overpaying £100 a month could save you £27,053 in interest alone and reduce your mortgage term by more than 6 years.
If you have a £150,000 mortgage over a 30-year period and an interest rate of 4%, overpaying £50 a month could save you £14,353 in interest alone and reduce your mortgage term by 3 years and 6 months.
If you have a £200,000 mortgage over 35 years with an interest rate of 3%, overpaying £200 a month could save you £41,723 in interest alone and reduce your mortgage term by more than 10 years.
Can everyone make overpayments?
Most lenders will allow their customers to make overpayments on their mortgage, but the exact rules vary depending on the lender you’re with. Some lenders have restrictions such as “you can only overpay up to 10% of your total original loan amount each year” but as I’m sure you’ll agree, most people won’t come close to exceeding this overpayment limit anyway! Other lenders also have a 10% rule but rather than calculating it as 10% of your total original loan, they’ll cap your overpayments at 10% of your outstanding debt.
If you’d like to make overpayments, get in touch with your lender to see if you’re allowed to.
I gave my lender a call a few months ago, asked if I could overpay by a small amount each month, and set up the direct debit there and then. The whole phone call took about 10 minutes.
Should I make overpayments or prioritise other things first?
I’m not a financial advisor and so I can’t tell you whether overpaying on your mortgage is absolutely the best thing for you to do or not.
For example, if you have access to a workplace pension, it may be the case that you’re better off putting your spare cash in that rather than throwing it at your mortgage. The best option for you will depend on a number of things such as how generous your pension scheme is and how high your interest rate on your mortgage is. If you want to find the very best option, it may be worth paying to see a professional financial advisor.
As far as I’m concerned, the important thing is that you do something with your money. If you’re overly concerned with finding the very best option to the point where you procrastinate making any financial decisions for months or even years, you’re going to end up worse off financially than if you just made a decision.
