Overpay your mortgage – it’s a good idea.
Figures from one of the largest mortgage lenders suggests that one in five of its borrowers are overpaying their mortgage. When the interest rate on their mortgage fell, they maintained their existing monthly repayment. If interest rates stay as they are (but they won’t – see yesterdays blog), then a 25 year repayment mortgage would end up being fully repaid after just 14 years.
A year ago a “life of loan” tracker mortgage of £150,000 cost £996 a month but today the payment has dropped to £600. If the borrower had continued to pay £996, instead of lasting another 24 years, the mortgage would be paid off in just 14 years.
That’s fine in theory but life isn’t quite as simple as that. Early repayment will only materialise if interest rates stay low. When interest rates rise, borrowers will have to increase their monthly repayments to achieve the same result. So not everyone will be able to knock years off their mortgage but it is still well worth keeping up over payments for as long as you can.
Just a few things to check out. Many mortgages allow over repayments but only up to a maximum of 10% a year. If you exceed that limit, those mortgages normally apply a penalty – so check that out. The other little trick that some lenders employ is that, when calculating the interest you owe, they don’t credit your overpayment straight away. That means that you are not saving quite as much as you should be doing. Not much you can do about it though!
