18 Jun 2024
Overpaying your mortgage vs money into savings
Should you overpay your mortgage? If you can put extra cash away you need to seriously consider whether you should pay more off on your mortgage which could save £1,000s, or choose to put it into a savings account with rates having improved.
Overpaying your mortgage
This can really help to boost your pocket – but you will need to ensure it is the right decision for you.
Pros:
- You won't pay interest on the amount you overpay
- You'll be chipping away at the debt you've built up from buying your home - this means you'll be mortgage-free sooner (check your overpayments to reduce the debt and shorten the term as opposed to reducing your monthly payments)
- The money saved on interest usually beats the returns by putting into savings
If your mortgage rate is around the same or higher than your savings rate, you will save money by overpaying.
Putting money into savings
A higher savings rate could beat overpaying your mortgage – but not always. This depends on a few things:
· Whether you are planning a one-off overpayment, or you want to overpay regularly over the longer term
· How much your mortgage debt is
· The number of years left to repay
· Whether you pay tax on savings interest
Is it right for me?
There are several mortgage overpayment calculators out there which will tell you how much you can save and over how many years, you can also check your lenders website for this information. Below are two examples of overpayment savings:
|
Overpayment per month |
Mortgage term reduction |
Total interest saved by overpaying a £150K mortgage at 5% |
Interest if saved overpayment at 4.5% |
|
£50 |
2.5 years |
£13,020 |
£9,610 |
|
£100 |
4.5 years |
£23,200 |
£15,423 |
Things to check before making overpayments
If you’ve worked out that overpaying works out better for you, you must check the following before proceeding.
1) Check if you have enough funds for any emergencies that may arise
If there is an emergency such as a leak in the house, or you’re suddenly made redundant and you’ve overpaid with all the money you had, you’d have to borrow again. Therefore, it’s always a good idea to keep a sufficient emergency fund.
2) Check if you have any other more expensive “unsecured” debts”
Clear the most expensive debts first. If you do that then the interest doesn’t build up quickly which saves you money and gives you the opportunity to clear debts sooner. Don’t worry about clearing any student debt loans, or credit cards where the debt is 0%.
3) Make sure you can overpay without paying a penalty.
This depends on what type of deal you have.
- If you’re on a fix or discount mortgage deal: most lenders allow you to pay 10% of you mortgage balance per annum without paying a penalty
- If you’re on an SVR (plus some trackers): you can usually overpay as much as you want but best to check.
How do I overpay?
If you've decided it's the right decision for you, the easiest and simplest way is to contact your lender. That way you can be sure it's allowed and you won't be paying any penalties. You will have two options:
- To reduce the next month's payment by the amount overpaid
- Keep payments the same and reduce your term
You must make sure you are clear with the lender about the option you want to go for.
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