The Bank of England has just announced a base rate rise to 0.75%. This is as most had predicted….
Overpaying your mortgage does have great benefits and potential rewards but it does depend on your circumstance. For example, if you have credit card debt with a higher interest rate, it would make financial (and probably psychological) sense to reduce its balance to zero before overpaying your mortgage. It’s also a clever idea to have some savings for emergencies and rainy days too. We recommend you have 3 months take home pay OR at the very least an income protection insurance policy to protect your income in the event of ill health.
Getting back to overpaying your mortgage, let’s look at an example of how overpaying a mortgage can seriously improve your long term financial security. If you had a £200,000 repayment mortgage, at a rate of 2.50% over 30 years your normal monthly payments would be approximately £790. If you were to overpay by £200 per month in this example you would reduce the term by around 8 years and 1 month saving you £24,655 in interest.
Interest rates are currently extremely low and if you overpay your mortgage now, you will reduce your mortgage debt therefore making any interest payments lower when rates do rise. You will also be accustomed to paying more thereby either eliminating any payment shock or at the very least reducing the payment shock.
You will need to check if your mortgage allows overpayments without penalty – this will be noted on your mortgage offer document however we can check this for you – just get in touch.
Overpaying your mortgage and keeping to the overpayments does require financial discipline which many people do not have. It could therefore be beneficial to commit to paying more by reducing the mortgage term.
Those of you with credit card and personal loan debt may consider consolidating these into the mortgage and reducing your mortgage term at the same time. In nearly all circumstances where debt consolidation takes place into a mortgage, the overall monthly cost reduces even when we knock 5 years off the mortgage term. Sounds great doesn’t it? Debt consolidation does however have its downsides too. If you are paying a personal loan over say 4 years and then put this into a 25-year mortgage, although the interest rate is likely to be lower on the mortgage you will likely pay more over the term to pay off the debt. Therefore, when we are approached with the objective of debt consolidating and reducing monthly outgoings, we strongly recommend reducing the mortgage term to counter act this negative effect. We will consistently encourage those that do debt consolidation to keep payments within a comfortable zone and turn a corner by not using credit cards or personal loans in the future.
To summarise, overpaying the mortgage has a positive impact. It provides savings and tends to provide financial security at an earlier age compared to those that don’t overpay. As with any situation, what is best for one, is not necessarily best for another. We’d be happy to chat over your circumstances and give you some advice. Please get in touch.