If you have streamlined your spending and examined where and how you can save, you might find that you have a little leftover. Thought of overpaying your mortgage? Paying more of your mortgage off, means you pay less interest. Heating, council tax, and gas bills have all increased. In some ways there is not much you can do to reduce the price of these things yourself. With interest rates higher than they have been for years there has never been a better time to get one back on the system by saving money on your mortgage. We look at the best ways to do so and crunch some numbers to show how a few extra pounds each month can shorten the term of your mortgage significantly.
There are essentially two ways to overpay your mortgage, in a lump sum or by adjusting your monthly payment.
Mortgage overpayment calculator
Most high street banks have mortgage overpayment calculators which will help you see how much you could save.
Overpay in lump sums
It could be that you get a good interest rate on a savings account. You can save an amount you are comfortable with and feel secure in case you need access to emergency funds. Then pay off so much of your mortgage in lump sums, always leaving a certain amount in your savings account.
Increase your monthly payment
Many people choose to increase their monthly payments.If you have taken out a mortgage with a term of 25 years for £150,000 at an interest rate of 4% then here are some inspiring numbers!
According to moneysavingexpert.com, paying an extra £10 per month could save over £2000 on interest and pay your mortgage off 6 months early.*
If you increased your payment by £100 then you could reduce the term of your mortgage by nearly four and half years, with a saving in interest paid of £17,000!
It is essential that you check the terms of your mortgage with your mortgage provider. There may be a penalty cost incurred if you overpay by a certain amount. That said you will still be able to overpay more than you might expect before being punished! For example, most mortgage providers will allow you to pay up to 10% of the balance before being charged for fixed-interest rate mortgages. One advantage of paying a variable rate mortgage is that typically you can pay off as much as you like.
A better deal
If you have been overpaying your mortgage and it’s time to get a new deal, you may find that you get a better interest rate because your loan-to-value (LTV) ratio is now lower. Typically, the more equity in your home the less interest you will pay. Paying off more of your mortgage can save you on interest in more ways than one!
Do what’s right for you
Perhaps you are struggling and this is something you will look at doing in the future. It may be that you have a grand plan and aim to pay off your mortgage in the next seven years. Whichever you decide to do, paying off a little or a lot has a big impact!
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