You’ve bought your house – great! And as the memory of stamp duty and legal costs starts (thankfully) to fade, you might find yourself wondering what to do if you have an extra bit of money left over each month.
Well, there are lots of choices, from splurging on some new furniture to hitting the casinos in Vegas. Or should you take the sensible option and put the money in a savings account? What you may not know is that there is a third option for many borrowers, and that is making overpayments on your mortgage.
Why should I make overpayments?
Depending on your lender, making overpayments can either take the form of an occasional lump sum (a one-off overpayment) or a small additional monthly payment (a recurring overpayment). There are two important benefits to making overpayments on your mortgage:
- You pay less interest over the term
- You shorten the term of the mortgage
By paying a little extra every month, and reducing your debt, you could significantly reduce both the interest and the term of your mortgage. For example, if you have a £150,000 repayment mortgage over 25 years with an interest rate of 4%, and you pay off an extra £100 a month, you could reduce your mortgage term by 4 years and 4 months and save a whopping £17,082 in interest*.
Another good thing about overpayments is that you can generally increase or reduce them to suit your financial circumstances. For example, if you have a sudden large expenditure you should be able to reduce or cancel your recurring overpayment. Conversely, if you get promoted you might decide to increase your overpayments to reduce your term and pay less interest.
There is a ‘but’. Some lenders may not permit overpayment and some charge an early repayment fee, so it’s crucial that you sit down with your broker to discuss what works best in your particular situation.
* Computer-generated information which is based on certain assumptions, for example a stable interest rate and a monthly interest charge. You can find an overpayments calculator here but it is crucial to get a specific quote from your broker or lender.