Overpaying your mortgage is actually a very big decision and there is more to it than it seems on the surface. In the current economic climate, it is an even more crucial decision than ever, so is it worth overpaying or are you losing out in the short or long term?.
Should I overpay my mortgage?
I think being a mortgage advisor is a little bit like being a chiropractor because when people find out what you do, they invariable have a question they want to ask. That’s fine by me, if I didn’t enjoy helping people I wouldn’t do this job. One of the most common ones I get asked is about over payment of a mortgage. So, let’s take a look at the pros and cons.
Before we look at overpayment I want to remind you that everybody has different circumstances and it is really important that you only act on any financial advice if you are sure it is right for you. A blog like this one cannot possibly cover all eventualities so, please make sure you have all the facts to make your decision.
The advantages of overpaying your mortgage
Mortgages are probably the longest-term financial commitment we make in our lives, (apart from children that is, as anyone who has ever had to buy a second pair of new school shoes in November will know) so paying it off quickly sounds a great plan. In fairness, for many people it is very good idea. Here’s why:
The obvious first benefit is that you will probably fully own your house sooner.
If your house has risen significantly in sale value, then you could find yourself sitting on quite a nice little nest egg earlier in life. Many householders also like the idea of being able to downsize and release that equity to give the children a start in life or retire earlier and so on. There is almost no scenario in which owning your home outright is a bad thing but that doesn’t necessarily mean that overpaying you mortgage is the right move for you right now.
It could save a significant amount of money in the long run.
As we all know a chunk of that mortgage repayment we make every month is interest on the loan. At the moment with those rates rising that amount is more than it has been for many years but even when the rate was low, it was still a pretty significant slice of your payment. The sooner you pay that mortgage off the sooner you will stop paying that interest. To see how much that will be worth you need to break down your payments and work out how much it will save you in the long run. This can be quite a complex thing to do, so make sure you get the numbers right.
It could be a good ‘savings’ option for you.
Try to think of what you overpay into your mortgage as a sort of savings account. If the amount you save in return for your investment is better than other savings models, then it is clearly a good idea. Again, this may not always be the case though and it needs careful consideration in relation to your personal circumstances.
The freedom factor.
In the end all financial decisions are about the people who make them. Losing your mortgage payments early could well bring you a freedom to enjoy life more later.
So, are there and cons to overpaying a mortgage?
Yes, and it is very important you know what they are. Overpaying your mortgage can be one of those shiny object ideas that look great but have some surprising downsides. As I said at the beginning of this article, owning your own home outright is almost never a bad thing. How you get there is the difficult question.
Can you afford to pay more?
Remember that sneaky comment I made about the cost of kids shoes earlier? Well, that, and other unexpected calls on your money may well be a strong factor. When you are considering overpayment think further than the monthly cost. Have you got the savings in place to cover an emergency? If not then it may be better to start there and overpay later.
What are the penalties for overpayment?
Most mortgages will allow you to overpay a certain amount for a fixed period and there will be a charge. So, you need to think about the early repayment charges (ERC). If these ERCs are unfavourable, that good investment could be a little less sound.
This is a very unstable market.
Now simply may not be the right time to make a big financial decision. The base rate has been rising steadily and inflation is very high. It could be better to wait and make a decision at some point in the near future. Obviously this is bit of an unknown so a lot will rely on your capacity for additional payments and disposable income.
Do you have more important debts?
While reducing your mortgage is a great idea the interest on some debts such as credit card and loans can be a bigger hit on your money. It may well be better to pay those off first. This is particularly true if you are recovering from a low credit score and took out higher interest loans in the past.
Overpaying a mortgage is like any other major financial decision. It needs careful thought through and should be examined from all angles. Changing your existing mortgage, moving to another property to downsize and similar options should also be looked into.
Whatever you decide, this is about you and your circumstances not a quick yes or no answer.