Overpaying on your mortgage can save thousands of pounds off your mortgage bill.
Shopping around for mortgages is so popular these days that many people can be excused for thinking that switching lenders is the only way to save money on your home loan. But there is a much easier way that does not require phone calls, computers connected to the internet, or trips to your bank or building society.
Did you know, for instance, that making overpayments on your mortgage can slash thousands of pounds off your interest bill? Additionally, it will cut the length of time taken to repay your home loan so you get to own your home sooner.
Imagine, say, that you have a £100,000 repayment mortgage, with a 25-year term and an interest rate of 6%. Your monthly payments will be £644, and after 25 years you will have paid back a total of £193,290. In other words you will have paid back £1.93 for every pound borrowed.
If, however, you were to overpay your mortgage by just £50 each month, your total payment would be reduced to £177,279 -- a saving of over sixteen grand in interest. Furthermore, this overpayment shortens the length of the mortgage by 45 months, which means almost four extra years of bliss.
Before you rush out to change your standing order or dump a lump sum into your mortgage, check to make sure that your lender won't punish you for doing so. In the main, most flexible mortgage lenders will allow you to make overpayments of up to 10% each year. But if your lender doesn't allow this, you have another trick up your sleeve!
Lessening the term of your mortgage from 25 years to 21 years would increase your payments in exactly the same way as overpaying by £50 each month. Mind you, this is a much harsher way to do it because payments are fixed. However, it doesn't prevent you from increasing your term again, should you need to, by simply writing to your provider.
On the whole, paying off your mortgage early is reckoned to offer one of the best risk-free rates of return around. Overpaying a loan charging, say, 6% a year is equivalent to earning a tax-free savings rate of 7.5% for a basic-rate taxpayer. For a higher-rate taxpayer, this risk-free and tax-free rate is equivalent to 10%, which is practically unbeatable!
Many people forget that even though we sign up for a 25-year mortgage term there is no earthly reason why we have to stick to this. If you have any extra cash each month, using it against your mortgage can make a huge difference and it can save you thousands of pounds in interest each year.
Good luck on removing that mortgage millstone from around your neck!
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This article was first published in Canary Wharf magazine.