A mortgage overpayment is a voluntary act of contributing more than the monthly mortgage repayment you agreed to with your chosen mortgage lender. You may have the option to do so in the form of occasional or a one-off lump sum payment, or as regular monthly top-ups.
Many homeowners don’t even know they can do this, so here we are going to take a look at the in’s and out’s of overpaying your mortgage, how it can benefit you and why it might not always be the best choice.
First of all, let’s take a look at the positives to overpaying your mortgage. The big ones of course, are that you could pay your mortgage off quicker than was first worked out, and that you could reduce how much interest you are paying overall, because you will be giving yourself a shorter term.
Further to this, you’ll also be reducing your monthly interest rates too, as you pay interest on the monthly amount you pay to the lender. That monthly amount could be reduced due to owing less overall, which in turn allows for less interest to be paid per month.
The flexibility of these options is what makes them so popular. Providing your lender allows for it in the first place, overpaying is entirely optional. Besides a limit that typically allows no more than 10% each year before fees are charge, you are free to overpay as little or as much as you want.
Another advantageous point is that doing so could increase the equity within your home. Equity is the difference between the property value and how much you owe. By reducing the latter through overpayments, you lower your Loan-to-Value, which allows for more choice if you want to Remortgage.
There are only two major downsides to overpaying your mortgage. The first of these is that you may encounter charges and fees for doing so.
If you manage to come into enough money early on (during your initial fixed period) and use it to pay off your mortgage, you will be faced with an Early Repayment Charge. This is generally somewhere in the thousands and more often than not, is not worth risking.
On top of that, there is a yearly limit in most cases, of no more than 10%. Whilst you can pay more than that if you wish, anything over 10% will generally leave you with additional charges for breaching that.
Overall there are more positive effects to overpaying your mortgage than negative ones. Even still, that doesn’t necessarily mean you should do so.
Sure reducing your interest rate is really handy, but at the risk of incurring large charges if you pay too quickly? It’s all about weighing up whether or not it is the right option beforehand.
Another factor that people should consider, especially after the pandemic of 2020, is having an emergency fund. You may have the ability to overpay, but you never know what is round the corner.
One month you could be putting a lump sum into your mortgage. The next month you could be in a situation where you need that money, but it’s already gone. If you’re going to make plans to overpay your mortgage, make sure you still have some money left over just in case you need it.
If you’re leaning more towards the idea of overpaying, then you’re going to need to know how. This is a fairly straightforward process. First of all, you’re going to need to get in touch with your mortgage lender and find out whether or not this is even possible.
Once you have done this, you’ll want to enquire about any fees or charges included in overpaying. This allows you to better plan how you’re going to do it, as otherwise you could face an Early Repayment Charge if you’re not too careful.
It’s also important to let the mortgage lender know what you’re looking to do. For example, some customers may want to reduce their overall term, whilst keeping their monthly repayments the same. Others may want the same term, but with lower monthly repayments.
Quite often these days, there will be options for overpaying your mortgage and looking at your remaining balance, either online or on apps. If your lender is a high street bank, you may be able to make arrangements for this on your online banking app.
Your mortgage lender will generally set a limit of how much you will be able to overpay. The general limit is around 10% a year of the remaining balance, though some deals may be more flexible, depending on your mortgage lender and the deal you are on.
If you go over this limit, you may open yourself up to charges, so it’s always handy to check with your mortgage lender before you make any additional overpayments.
You need to be careful with what you’re spending on a mortgage for overpayments. Once you have overpaid, it can be incredibly difficult to get that money back, with your only option often being to remortgage to release equity. Depending on your current deal, the deals available and the market at the time, this might not always be a viable choice.
We would definitely recommend making sure you don’t overpay with all of your disposable income, instead saving some for when you absolutely need it. It’s always better to have some savings on the side for emergencies, like the pandemic, for example.
If you would like to overpay your mortgage, you definitely need to speak to your mortgage lender to make sure you can do this.
Alternatively, if you’ve already been overpaying and would like some remortgage advice ahead of releasing your equity to remortgage onto a better deal, book your free remortgage review. A trusted remortgage advisor will get started on your process.