Mortgage overpayments provide an opportunity to become mortgage free sooner! For those with surplus income each month, using this money to reduce your mortgage may be something you wish to consider. In this blog, we’ll look at all things mortgage overpayments…
All lenders will allow mortgage overpayments to a certain extent without incurring costs for doing so. On fixed rates mortgage products this is commonly limited to 10% of the mortgage balance each year. For example, if the mortgage is £500k, the most you can overpay that year is £50k on top of your regular monthly payments. If you choose to overpay more than this, you will start incurring early repayment, as detailed in the terms of your mortgage offer. A very small number of lenders will allow 20% overpayments if you want the benefit of a fixed rate and being able to make large overpayments without costs. Conversely, on tracker and other variable rate mortgages, it is normal for these to allow unlimited overpayments due to the absence of any early repayment charges.
Between mortgage deals, whether you’re moving home or remortgaging your current home, you have the option to make an unlimited overpayment without incurring any costs.
The mortgage term determines the minimum monthly payments on the mortgage. Adjusting this helps increase and decrease the monthly payments. For example, a £500k mortgage over 20 years will have higher monthly payments than a £500k mortgage over 35 years. Spreading the mortgage over a longer term reduces the monthly payments. However, you will pay more interest over a longer term.
Guidance from the Financial Conduct Authority (FCA) is that you take the mortgage over the shortest practical term. A longer term will result in more interest being paid over the term of the mortgage. However, a longer mortgage term coupled with regular overpayments can have the same effect as choosing a shorter term. You could still pay less interest by paying your mortgage off before the end of the term, while also providing the financial flexibility of not being tied to a higher monthly payment should unforeseen costs arise. Budgeting for unforeseen costs is recommended and arguably still means you’re taking the shortest practical term.
The maximum mortgage amount offered by a lender will also start decreasing as the mortgage term decreases past a certain number of years, specific to each application. In certain scenarios, you will need to take a mortgage over a longer term than necessary, to be eligible for the mortgage amount you require. In this case, overpayments allow you to pay the mortgage off faster, hence reducing the interest paid, according to what you could truly afford each month.
The process of making overpayments on your mortgage is simple. It involves you contacting your mortgage lender and confirming you wish to make an overpayment. You can make a one-time payment or, if you wish it to be a regular amount each month, you can set-up a standing order for the amount you wish to overpay each month.
It is important to fully understand the terms of the mortgage if you’re thinking about large overpayments. Some fixed rate mortgages allow unlimited overpayments without early repayment charges and some tracker mortgages don’t allow unlimited overpayments without early repayment charges – different to the norm!