With mortgage rates rising, putting more money towards your monthly bills than absolutely necessary may be the last thing on your mind.
But overpaying on your mortgage – where you pay more than your lender has asked for on a monthly basis or as a lump sum – can “save you money in the long run”, said MoneySuperMarket. “It will mean there’s less interest to pay overall, since you’ll clear your debt quicker.”
Overpaying a mortgage may not be for everyone, though, and there are various pros and cons to consider.
Pro: becoming mortgage-free sooner
Borrowers can usually make a lump sum overpayment, add to their monthly payments, or do both. By overpaying, you will “pay off more of the money you originally borrowed quicker than you first calculated”, said NerdWallet, meaning you clear your mortgage sooner. For example, if you owe £100,000 on a mortgage with a 20-year term and an interest rate of 3%, paying an extra £200 as a regular monthly payment could save you £11,596 in interest over the lifetime of the loan and cut the term by six years and seven months.
Con: other debts could mount up
It may be tempting to be mortgage-free as fast as you can, but a “crucial rule of debt repayments” is to clear high-interest credit cards and loans before overpaying your mortgage, said MoneySavingExpert. Interest on these products is usually more expensive and you can end up in deeper debt if you fall behind on repayments.
With most savings rates still below inflation, “the money you save on mortgage interest often beats the returns you would get from putting the cash in a savings account”, said The Times Money Mentor. According to Confused.com, if your mortgage interest rate is higher than your savings interest rate, you should “consider making the overpayment” as it could be a better use of your spare cash. For example, £5,000 in a savings account with 1% interest would earn £50 in a year. But if you had £5,000 left on a mortgage with a 3% rate, you would pay £82 interest. In this case, overpaying is worth it, as “the interest you’d get from savings would be less than the savings you’d make by not having to pay the interest on your mortgage”, Confused.com said.
Con: can’t get that money back
When you put cash into a savings account, you can access it if and when you need. That’s not the case when you put money towards your mortgage. Make sure you don’t “drain any emergency savings you have” for things such as fixing a broken boiler or funding expensive car repairs, said Go.Compare. Make sure you still have money set aside for “rainy day” emergencies, the comparison website said, which recommended trying to keep enough to cover six months’ essential expenses.
Pro: better remortgage deal options
Overpaying will “chip away much more quickly at what is owed and could help you qualify for a lower loan-to-value deal when your fixed rate ends”, said ThisisMoney.co.uk. Chanelle Pattinson, a financial planner at Money Means, explained that lenders generally view borrowers with lower loan to value (LTV) ratios as “less risky”, so “may offer slightly more preferable rates” if and when you need to remortgage.
Con: early repayment charges
Lenders typically have limits on how much you can overpay each year, usually up to 10% of the value of your loan. Most fixed-rate and discounted mortgages also have penalties, known as early repayment charges (ERC), which kick in if you pay the loan off before the end of the term. This “would easily wipe out any interest savings”, said MoneyWeek. However, in some cases, it may be worth paying the fee in order to move to a mortgage that saves you money in the long term by locking in a rate now before costs potentially rise further.