Should I overpay my mortgage? The pros and cons

Expert advice on the benefits and shortfalls of overpaying on a mortgage
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  • If you’ve got some money put aside, and are looking to invest in your future, why not ask yourself the question: should I overpay my mortgage?

    While paying off a mortgage as early as possible is a goal for many homeowners, especially those fortunate enough to have the savings to do so, overpaying a mortgage does have both pros and cons to consider. We’ve got expert advice that spells out everything you need to know when considering overpaying on your mortgage agreement.

    Should I overpay my mortgage? The pros and cons

    If you’re lucky enough to have savings, and with the best mortgage rates ever right now, overpaying your mortgage might be a good choice. You usually have the option of making a one-off lump sum payment towards your mortgage or increasing the amount you pay back monthly.

    Even if you’re only in a position to reduce the size of your mortgage, a one-off repayment or regular extra repayments is still well worth it.

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    Image credit: Future PLC/ Alison Hammond

    However, check with your mortgage provider to see what it allows. This is particularly important if your current mortgage offer – a fixed or discounted rate for a set term, for example – still has time to run.

    Many providers only allow overpayments of 10 per cent of the remaining balance during this term. By contrast, if your deal has finished and you’re now paying your provider’s standard variable rate there shouldn’t be any limits on the amount you can pay.

    Both options will lower your total interest payments, but the former will result in a bigger saving. Also, a lower overall balance on your mortgage could be a benefit when remortgaging and may open up better deals to you.

    If you can pay off your mortgage in full, you’ll no longer have to make monthly repayments. Plus, the total cost of the loan will be lower than expected, because you’ll be paying interest for a shorter period than you originally anticipated.

    Should I overpay my mortgage? Is it worth it?

    This comes down to a personal decision based on your circumstances. Currently, the returns available from a savings account are poor, so reducing or paying off your mortgage is likely to be more financially valuable. Check on how the costs involved, including early repayment fees, might change that calculation.

    It’s also important to consider if you will need your savings anytime soon. If there’s a chance you will, you may prefer to have the cash in an account that you can access when you want to. Some mortgage providers do allow underpayments as well as overpayments. This means you may be able to pay extra now, to reduce your mortgage interest, and then take back some of the cash later, by underpaying for a period.

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    Image credit: Future PLC/ Colin Poole

    Do you have other debt that should be a priority?

    If you have any other debts which you’re paying interest on, these should take priority over repaying your mortgage. This is because, in most cases, this debt will be more expensive.

    For example, if you’re paying interest on a credit card or loan, the rate is likely to be more than the interest rate of your mortgage.

    If you have debt you are managing which doesn’t charge you any interest – an interest-free loan on a home improvement, say – this falls into a different category. Unless you choose to, there’s no need to clear this debt as long as you’re comfortable paying it off. Ensure there’s no danger of you having to pay interest on it in the future.

    Keep an emergency savings fund

    Before you ask the question, ‘should I overpay my mortgage?’ look at your savings situation first. Everyone should have an emergency savings pot stored in a savings account. Choose one you can access if you need to and make sure it earns interest. You should aim to have between three and six months of your regular income in this account.

    This savings pot is for unforeseen emergencies – anything from a broken-down car or a faulty boiler to a period out of work. It’s for the things you can’t predict; having this money set aside will mean you don’t have to reach for a costly loan or credit to tide you over.

    How can you pay your mortgage off early?

    With savings rates at rock bottom, thanks to a prolonged period of low interest rate from the Bank of England, putting any extra money you have into your mortgage instead could be a good option. You’re almost certainly paying a higher rate on your mortgage than you could earn on savings cash.

    How much will it cost to make a mortgage overpayment?

    It’s important to check with your provider before making a payment. Some charge penalty fees for doing this. The amount you’ll pay depends on the balance of your mortgage, and how close you are to clearing it completely.

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    Image credit: Future PLC

    Would investing the money elsewhere make more sense?

    Overpaying your mortgage is one option for your savings but there are many other places you could put the money.

    Bank and building savings accounts are just the start, although they do have the benefit of offering you easy access to the money if you need it.

    1. Pensions

    Putting money into your pension is another option. Plus, you’ll get an extra top up from the government for any money you put in, because tax relief is available on pension contributions. A pension calculator will show you how much you could claim.

    2. Stock and shares

    Investing in the stock market is another choice. Everyone gets an allowance of £20,000 to put into an individual savings account each year. This money can be invested in a very wide range of assets, including cash savings, but also in shares and bonds. All returns – both income and profit – are then tax free.

    The aim with stock market investment is to secure a better return over the longer term; say five years or more. That’s what’s happened in the past, with shares outperforming other types of investment over longer periods more often than not.

    What’s vital is to recognise that there are no guarantees. Investments can fall in value as well as rise. You need to be prepared to lock up your money for the long term. Otherwise, the risk is that you need to access it at a time when it has fallen in value. Take a look at the Financial Conduct Authority (FCA) for more information about investing smart.

    Sarah Coles, a spokesperson for Hargreaves Lansdown, explains: ‘The return you’re likely to get from investments over the long term is likely to be more than the money you save on your mortgage. But, this isn’t the only calculation you need to bear in mind.

    If you have a long mortgage that takes you into retirement, you might be worried about repayments in future, so it might give you peace of mind to overpay. If you’re carrying a huge mortgage and you’re worried about how it would be affected if interest rates rose, you might choose to pay it down.’

    3. Split your funds

    ‘If you have a manageable mortgage, and robust finances in general, meanwhile, you might prioritise the potential for extra returns from an investment,’ continues Sarah.  ‘Alternatively, you might take the middle way and use some of the cash to pay down your mortgage and some of it to invest.’

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