Thousands of borrowers have been enjoying low mortgage repayments whilst the Bank of England base rate has been at 0.5% for a record 30 months. It is of course tempting to enjoy the extra cash – whether it’s to absorb other rising costs such as petrol and utilities, or to spend on more exciting things. However, it’s worth remembering that making regular overpayments of your mortgage can pay dividends in the long run.
There are a number of benefits to making mortgage overpayments. The first is that by overpaying, you are chipping away at the debt that you owe to your mortgage lender. If you are on a repayment (also known as capital and interest) mortgage, this means you will pay back the capital more quickly, leaving you mortgage free sooner.
If you’re on an interest only mortgage, overpaying will help you reduce your debt, rather than just simply paying the interest on the mortgage. This will leave you with less to pay back at the end of the mortgage term.
In either case, as you’re reducing the amount you owe, you’ll also pay less interest over the life of your mortgage.
Another benefit is that by reducing the amount you owe more quickly, you will decrease the value of your mortgage relative to the value of your property – or put another way will lower your LTV (loan to value). This is very important if you want to remortgage in future as the lower the LTV, the better the mortgage deal you will be able to access. It’s good too if you want to move home as the more capital you repay, the more equity you will have available for a deposit on your new home.
The third benefit is that if you reduce your outstanding mortgage balance whilst rates remain low, when they start to go up again, the interest you pay will be less than it would have been if you hadn’t reduced the level of your mortgage.
The following example illustrates just how beneficial overpayment could be. A borrower has a £140,000 mortgage repayable over a 25 year term on a capital an interest basis and the current mortgage rate is 1.99%. The monthly payment for this mortgage is £592.71. Overpaying by £200 a month would save £12,020 in interest over the term of the mortgage and it would be repaid 7 years and 5 months earlier.
If you don’t want to overpay every month but expect a lump sum at some point, perhaps from a bonus, you can arrange to make a single lump sum payment which will also have the same benefit of reducing the mortgage term and the level of interest payable.
Your lender may impose restrictions on the amount that can be overpaid each month or in a 12 month period, so be sure to check with them first as you don’t want to incur penalties for overpaying.
If you are enjoying low mortgage payments and think you could spare some cash to make overpayments, contact your lender as soon as possible. Action today will reap rewards in the future.