Are You Overpaying on Your Mortgage?

One of the questions most frequently fired the way of independent financial advisers is that of mortgage overpayment. Not in the sense of paying too much for any given mortgage deal, but rather in the sense of paying over and above the minimum monthly payments.

Mortgage Payments.

 

Specifically, most queries seem to centre around the question of whether it makes more sense to overpay on a mortgage, or to take the sum you could overpay and put it into a savings account. Savings accounts promise regular interest payments while mortgage overpayment can lead to big savings and an early completion date for the loan, so which makes more sense?

A Question of Individual Circumstances

Well, the simple answer is in fact that there is no simple answer. As is the case with the vast majority of financial matters, it all comes down to the individual financial circumstances of those in question.

For example, if you are currently overpaying on your mortgage and yet have other outstanding debts like credit cards and personal loans, chances are you could be better off switching things around. The reason being that mortgages generally tend to attach much lower interest rates than credit cards and personal loans, so it’s often a good idea to first use any extra cash to pay off these debts and then think about the idea of mortgage overpayment. That’s assuming of course you’ve put enough to one side to serve as the all-important ‘financial cushion’ most experts advise pretty much anyone to establish. This is where extra cash is put to one side to such an extend as to stack up the equivalent of three to six months of your current household income, just to be on the safe side in case of emergency.

Now, if by contrast you are already largely debt-free and have a chunk of fall-back cash on-hand, mortgage overpayment can make a good deal of sense. Not only will a monthly overpayment reduce the mortgage term, but it’ll also take a nice chunk out of the total amount payable. If, for example, you had a £100,000 mortgage over 25 years at a fixed 5% rate of interest and paid an extra £500 a month off the balance, you’d pay the whole thing off 15 years earlier and save close to £50,000.

In terms of whether this represents the best option for the extra cash, you’d have to be looking to find a savings account that is willing and able to pay you over and above this 5% rate of interest in order to amass more money than you’d save by overpaying on your mortgage. This is in fact surprisingly difficult to do these days as there aren’t many accounts out there that promise this kind of interest unless you’re willing to pay a fair bit more than £500 in per month and not touch the cash for some time.

On the whole, it all comes down to the mortgage you’re paying, your financial circumstances at the time and the kinds of options available to you with your credit report and whatnot. As such, there’s always the potential for making improvements and indeed making the most of what’s yours – all of which should be discussed and clarified with an independent financial adviser.