Topical Mortgage News and Rates
This month, Independent Mortgage Adviser, Chris, discusses if it is best to make overpayments on your mortgage whilst interest rates on savings are so low. What are the things to watch out for?
Read more, including this month’s BEST RATES, here.
This does not constitute advice and advice should be sought in all instances before acting on it.
Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Paying off debt V making savings
It is no secret that savings interest is virtually non-existent at the moment, so money-savvy professionals are seeking better ways to utilise their money.
Paying off debts such as credit cards and personal loans is generally always advisable before making any significant savings. This is because the interest paid on debts is typically higher than what is made on savings, making it a more robust strategy over the long-term.
Mortgages are usually ignored as so-called “debts” in this situation, as many homeowners are happy to fork-out their mortgage payment each month, safe in the knowledge that in ‘X” number of years they will be mortgage-free.
In recent months, homeowners have been delighted with the low interest rates on mortgages, giving them more disposable income at the end of the month to splash out on the latest gadget, or weekend break.
Have you thought about the effect of using the surplus income to over-pay your mortgage instead though?
Not only can this reduce the overall interest you pay on your mortgage over it’s lifetime, but you can reach that mortgage-free haven much quicker.
- Save thousands of mortgage interest over the mortgage term
- Own a mortgage-free property sooner
Frankly speaking, for doctors and dentists, it can make sense to over-pay on your mortgage anyway, if income levels allow.
But now with low rates, it is definitely worth weighing up the prospects of earning perhaps 1 percent on savings, versus “save” having to pay perhaps 2.5 percent on a mortgage.
Be careful of the over payment limit set by lenders
Most mortgages allow over payments to be made, but as lenders don’t encourage it, there is typically a cap as to how much you can overpay.
Often this cap is 10 percent of the mortgage advance, some do allow 20 percent, but it is a case of checking your terms & conditions.
If you wish to overpay above the lender’s cap, then usually early repayment charges kick in, which counter-balances the benefits of saving money on the long-term interest.
What are the financial benefits of overpaying?
Here is an example of how much you could save over the long-term by overpaying a small amount each month on your mortgage.
- 25 year mortgage with £150,000 outstanding
- Monthly repayment, using an average rate of 2.71 per cent = £690
- Overpayment at 10 percent = £69
Overpaying the mortgage by 10 percent each month means you would save £35,350 in interest over the mortgage term. Also, your mortgage would be repaid in full 13 years earlier.
So, paying debts before making savings, particularly with the interest rates at these low levels, can certainly be beneficial.
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Tel: 01403 780 770