“Mortgage overpayments can save you a lot of money that would otherwise go toward your interest payments.”
There has been a surge in a number of people making overpayments on their mortgages. If you are saving hundreds of pounds by paying more than the agreed-upon amount, taking a bite out of your larger debt is actually a good idea. Of course, you could earn interest if you put your money into savings account, so why are people not taking advantage of it? Low saving interests are not trickling fancy of people because interest payments on mortgages are higher than the interest you earn on savings. Even a little portion of that money to overpay your mortgage does make a sense because you can save huge pounds.
Some buyers overpay with the hope of having a mortgage term shortened. When you overpay your debt, your lender will whittle down your monthly instalments. Lump sum payment reduces the size of your mortgage and hence you are likely to pay off lower monthly instalment. If you want to diminish the term of your mortgage, you will have to increase the size of your capital. If you have taken out interest-only mortgage, you will pay off the capital along with the interest amount. This will be possible if your lender puts the size of your monthly instalments the same as before overpayment so that the additional part of the amount goes to the capital, reducing the term of your mortgage.
The use of mortgage calculator
Before you should overpay your debt, you should use the online mortgage overpayment calculator. It will show you an estimated figure how much you could save. There are several popular mortgage lenders providing access to calculators to different buyers. Remember that overpayment leads to prepayment charges and the calculator does not take into account the fees and other factors. Before you overpay your debt, make sure that prepayment fees do not offset the amount you save in paying off interest. Talk to your lender to know if they will charge prepayment fees. Excess payment usually allows you to have reduced monthly repayment. If you are looking to get the term shortened, you should talk to your lender first.
Is overpayment calculator different from how much can I borrow calculator?
A mortgage calculator is not subject to estimation of overpayment cost. You can use the basic calculator known as mortgage how much can I borrow if you are a first-time buyer. When you apply for a mortgage to get on the property ladder, your lender will try to look over your monthly incomings and outgoings. If the lender finds that your financial commitments are high, they may restrict the disbursal amount. The basic calculator will help you know beforehand how much the loan is going to cost you. It does not take a long time; you just have to fill out your income and regular spending.
When is excess payment a problem?
Excess repayment does not make a sense if you have other small loans like installment loans, credit card dues, payday loans, and the like. These loans require you to repay the debt in lump sum. The debt continues to build up if you fail to fall behind repayments. If you have got extra money, you should utilise them to settle your credit card dues and small loans.
Overpay your mortgage only when you are lucky enough not to have a burden of other short-term debts. If the interest rate is very low, excess payment will not help you save a lot of money. Instead, you should invest that amount somewhere else to build up your income.
Is it possible to overpay without any penalty?
Most of the borrowers ignore overpayment despite affordability because they think that it will cost them even more as direct lenders charge prepayment penalty to recover the loss they suffer due to early repayment. Well, lenders allow you to overpay the mortgage without incurring any fees as long as the excess amount is equivalent to 10% of the home loan each year. Some lenders allow you to repay up to 20% of the home loan every year.
Since each lender follows different policy, you must know about the term and condition associated with overpayment. In some cases, you may pay off up to 10%, subject to a minimum of £500. However, some lenders will allow you to overpay only in a specific period, for instance, in the third quarter. If that period has passed you by, you should stash your cash in savings account, at least you will earn some interest.
When you overpay your debt, make sure that the amount does not go beyond the penalty-free range, and if you are fortunate enough to have money to overpay, it should be still worthwhile. Otherwise, it will cost you an arm and a leg and your finances will ruin. One of the best ways to avoid penalties is to set a minimum limit and keep your lender in the loop if you do so. If you want to pay additional money toward the capital, you need to consult your lender whether they approve it or not.
Dispelling your myth, overpayment will save you more or less the same whether your lender reduces the mortgage term or diminishes monthly instalments. As the term of the mortgage reduces, the total interest payment over the period of the loan will whittle down but the monthly and annual cost of your mortgage will go up. So, it offsets the loss of mortgage lenders that they may suffer due to shortening the length of your home loan.
The bottom line
Overpayment is not a bad idea as long as you have enough money because it will help you get rid of the loan as quickly as possible. The sooner you settle your debt, the better. Whether you are applying for a mortgage or thinking to overpay it, you should use mortgage repayment calculator to know the monthly and annual cost.