Making overpayments on your mortgage can be a great way to save money in the long run. But not all mortgages allow for overpayments, so it's important to understand the different types of mortgages and their associated rules before you start making additional payments. An amortization mortgage (principal and interest) and an interest-only mortgage are two types of mortgages that allow for overpayments. However, if you have a fixed-rate mortgage with early repayment fees, making an overpayment could result in these charges being applied to you.
It's also important to note that once you've overpaid, you typically won't be able to get a refund or access those funds again, unless you remortgage. To get an accurate idea of how overpaying could affect your balance and term, talk to your mortgage lender. Some mortgages, such as follow-up mortgages and standard variable rate mortgages, may allow you to overpay as much as you want without penalty. However, what you can and can't do can vary between mortgages and lenders, so check for any restrictions in your contract before continuing with overpayments. An early repayment fee (EPC) is a penalty imposed on you by your mortgage provider if you overpay or if you pay off the entire loan too soon; this is often the case if you move from home and cannot transfer your mortgage to the new property. Overpayments could help borrowers save thousands of pounds in interest over the life of the mortgage.
When you take out an amortization mortgage (with an interest of 26% of the principal), your lender will calculate how much you should repay each month to ensure that the mortgage is paid off by the end of the agreed term.
Things to Consider Before You Overpay on Your MortgageIf you want to pay off your mortgage faster, here are some things to consider before you start. You may want to pay off a large portion of your mortgage after inheriting money or selling an asset. For example, if you want to shorten the term of your mortgage with a repayment mortgage, you'll want to ask you to keep your regular monthly payments the same in the future, so that you're overpaying. Let's say you owe £100,000 on your mortgage and are paying an interest rate of 3% when you have 20 years left on your mortgage term.
If you're not sure, you can find out by consulting your lender, consulting the mortgage offer document, or searching online before making any overpayments. If you bank online, with some lenders you can change your mortgage payment online. Making a single payment of a large sum instead of gradually overpaying each month will help lower your mortgage balance more quickly and save more in interest.
ConclusionMaking overpayments on your mortgage can be a great way to save money in the long run.
However, it's important to understand the different types of mortgages and their associated rules before making additional payments. Talk to your lender for an accurate idea of how overpaying could affect your balance and term. Some mortgages may allow for unlimited overpayments without penalty, while others may have restrictions or early repayment fees. Consider all these factors before making any decisions.