You might think that paying more than the minimum on your mortgage is a good alternative if you have a lot of extra money and don’t know what to do with it. Never considered it before? If you want to know if it’s right for you, keep reading!
What is a mortgage overpayment?
Overpayments on a mortgage loan are additional payments made. Although your lender has established a fixed monthly repayment amount for you, you might choose to pay more on top of it. There are two methods to go about this.
If you have recently inherited money or received a bonus from work, for instance, you can pay in one lump sum. If your wage has grown or your interest payments have decreased, you can increase your monthly repayments as a second option.
Why would I want to make extra mortgage payments?
Mortgage debt is likely the biggest financial burden you will carry during your lifetime. When you consider monthly expenditures, your mortgage repayments will most likely be the biggest outgoing. So it’s natural that people want to clear this debt as soon as possible! And overpaying on a mortgage allows them to do just that.
Depending on how much you choose to pay, mortgage overpayments can reduce the length of your mortgage term and reduce the amount of total interest you will pay on your loan.
Main benefits of mortgage overpayments
- Reduces the time it takes to pay off your mortgage.
- Reduces the amount of interest you need to pay.
- Reduces the total repayment amount of your mortgage.
What are the downsides of mortgage overpayments?
When taking into consideration the enormous savings you could make when overpaying on your mortgage, the obvious answer is yes. But there are some possible disadvantages you should think about.
Lender restrictions
Check with your lender to see if there are any restrictions when it comes to overpaying. This is usually the case for fixed-term mortgages. Restrictions may come in the form of an annual cap on overpayments, a financial penalty for overpaying, financial penalties on overpaying too much, or no overpayments at all.
Other debts
It’s possible that you have more than one debt you’re paying off each month. Your mortgage is just one. And while a large amount of debt may seem like a burden, it is usually one of the cheapest ways to borrow money.
Before committing to repaying, be sure your extra cash could not be put to better use like paying off high-interest credit cards or loans, which are far more expensive ways to borrow money.
Once it’s gone, you can’t get it back
Overpaying is not like putting money into a bank account which you can later take back if you desperately need it. Once it’s gone, it’s gone. So make sure you have enough saved up in a separate pot for financial emergencies and only use your spare cash for mortgage overpayments if you are able to comfortably.
So, should you overpay your mortgage?
The answer to that is…it depends! If you are financially secure with a good salary, a large emergency savings funds, and you’re not busy paying off other high-interest debts, then overpaying your mortgage may be a viable option for you to cut the length of your mortgage term and reduce your interest.
If, however, you have lots of other higher-priority debts you need to pay off and are just about meeting your existing monthly repayments, then overpaying your mortgage may be a risk and should be at the bottom of your list.
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