Should I Overpay My Mortgage?

With savings at an all-time low, the natural choice is to pay off your mortgage early. For some, this is the right choice, with potential savings in the tens of thousands. However, it’s not exactly a no-brainer. There are plenty of things to consider, such as repayment penalties, paying off existing debts and holding on to your rainy day fund. 

Reasons To Overpay

The great thing about overpaying your mortgage is that it chips into the debt that you’ve built up as a result of interest. Every penny you pay back brings you closer to the day that you’re mortgage-free.

Because interest rates are so low at the moment, paying off your mortgage saves you more than you’d make putting the equivalent amount in a savings account. If you have a 3% mortgage, then you need your savings interest rate to be above 3% to make financial sense for you. By overpaying on your mortgage, you’ll reduce the amount of money that you can be charged interest on. 

Why Lenders Don’t Want You To Pay Off Your Mortgage Early

Seems strange right? Financial institutions love your money. The longer you take to pay it – the more money they make. Most lenders allow you to pay 10% of your mortgage balance per year if you’re still in your introductory (also known as fixed, track or discount) period. If you want to overpay during this period, there will likely be an Early Repayment Charge. There is a considerable variation in the flexibility of mortgage terms, so please check with your provider. 

In most cases, if you’re beyond your introductory period, then you can probably overpay by as much as you like, as long as you are at your lender’s standard variable rate (SVR). The SVR is the standard mortgage rate you’ll be charged at (as long as you don’t remortgage). 

However, some SVRs are expensive. It can change, and your monthly payment rate will be higher. And, you’ll be paying off more of the interest – not the capital of the mortgage. If your SVR increases then remortgaging could be a better option than overpaying.

Some lenders will serve a penalty if you try to overpay on your mortgage. The chance of a penalty can vary greatly depending on the terms of your mortgage. Some impose a flat-rate fee of 5% to all overpayments; others charge you more for a higher overpayment. The extra amount you’ll have to pay also depends on how many years there are outstanding on your loan.

These rules are in place to mitigate the loss of profit for your mortgage provider. Your mortgage was agreed based on the amount of interest that the bank or building society was likely to collect. By allowing you to overpay without a charge, your mortgage becomes less worthwhile for your mortgage provider. By regulating your ability to overpay, the mortgage provider can control their profits. This doesn’t contribute to making overpaying your mortgage a compelling prospect. 

First Pay The Debts That Keep You Up At Night

The golden rule of debt repayment is to pay your most expensive or highest-interest debts first. So, before getting too excited about pulling your home from the claws of the bank – start paying off your most pressing debts. The most notable of these are high-interest credit cards and personal loans

Save For A Rainy Day

For those with existing credit card or loan debts, all sources correctly point to paying those off as soon as possible. However, for those without financial strain, having an emergency fund is the next most crucial thing for financial security. A rainy day fund is a more practical option for when unexpected circumstances strike than overpaying on your mortgage. 

After all, if you are struggling in the future, your mortgage provider won’t be lenient just because you overpaid in the past. Especially taking into consideration the ways that mortgage providers put in provisions to ensure that you carry on paying interest. These are both predatory and irritating, but making early repayment unattractive in many ways. In the majority of cases, making a mortgage overpayment is not as wise a decision as having 3-6 months of money for the times when you most need it. 

If you’re otherwise debt-free, have a considerable emergency fund and have checked the penalties in your mortgage terms, then mortgage overpayment could be an option for you. The answer of whether overpaying your mortgage is worth it will depend on your mortgage and terms. Additionally, the real impacts of housing and mortgages as a result of COVID-19 are yet to be seen.