Overpay your mortgage and save money

In these times of economic gloom, we are constantly looking to save money, and get the best deals available.

We are constantly looking for advice on all aspects of our financial lives.

Perhaps our biggest financial burden is our mortgage, and it is probably the one we are most laid back about. The payments are viewed as a ‘given’, they fly out each month and we all accept that we will have this debt for at least 25 years.

 

At this time of incredibly low interest rates, it would be prudent to ‘overpay’ the mortgage.

Any borrower who has seen their monthly mortgage rate drop, due to a very low interest rate (0.5%) Should just keep on paying a ‘standard level’- this could lead to overpaying your mortgage by many hundred of pounds per month.

The benefits to be had from overpaying the mortgage can be so significant that it is surprising how few borrowers actually do it. Overpaying also increases the amount of equity you have in the property, this in turn allows you access to better deals when you are shopping for new mortgage finance. It is worth noting that once the spare cash is paid in to the mortgage it is gone and cannot be used for anything else. This is the reason many of us put out surplus cash into savings etc, as it can be easily accessed at very little notice.

 

In the real world we don’t overpay our mortgages, because we’re already at the top end of what we can afford. If there is spare cash, we use it to pay off debts, save it or fund other purchases.

Most lenders will only allow a certain amount of overpayment every year, usually 10% of the overall mortgage amount, they may charge you for this privilege, this is known as ELC (early repayment charge) if you have a flexible mortgage the 10% rule will probably not apply.

With normal savings rates being particularly low, many borrowers with significant savings would benefit from offsetting, as they would earn the equivalent of the mortgage rate on their savings. This method of overpaying also allows the borrower to keep their savings ‘liquid’ as they can always access the money from the offset pot at any time. It is also worth bearing in mind that any interest you earn on your savings is taxable at your highest rate of income tax, which might be 20%, 40% or, as of April 50% for the highest earners. If you use your savings to overpay your mortgage instead, not only are you effectively earning interest on them at the mortgage rate, but because they no longer technically exist as ‘savings’ you do not pay any tax.