Mortgage holders can knock thousands of pounds of interest off their loans by increasing payments only slightly every month, an expert has said.
To “illustrate the savings” of overpaying a mortgage, Pete Mugleston, MD and mortgage expert at Online Mortgage Advisor, explained: “Consider a £200,000 mortgage with a 25-year term at an interest rate of three percent.
“Without overpayment, you would pay approximately £84,000 in interest over the term of the mortgage.
“With an overpayment of £100 each month, you could save around £14,000 in interest and shorten the mortgage term by roughly four years.”
Mr Mugleston added: “One of the key benefits of overpaying your mortgage is the reduction in interest payments over the lifetime of the loan. Since mortgage interest is calculated on the outstanding balance, reducing this balance early can lead to significant savings.
“By overpaying, you can also shorten the term of your mortgage, potentially paying it off years earlier than planned which not only saves on interest but also provides financial freedom sooner.”
Additionally, Mr Mugleston said overpaying increases equity in the home faster. He said: “This can be particularly beneficial if you plan to remortgage or sell your property, as you’ll have a larger share of the property’s value at your disposal.”
However, there are several considerations people should take into account when deciding if overpaying is suitable for their finances and circumstances.
Mr Mugleston pointed out that many mortgages have terms that include an Early Repayment Charge (ERC).
He explained that an ERC is imposed if a person overpays their mortgage beyond a certain limit, typically 10 percent of the outstanding balance per year.
Therefore, he noted: “It’s essential to check your mortgage agreement to understand any penalties you might incur.”
While overpaying a mortgage can save money in the long run, it’s also important people don’t compromise their financial flexibility.
Mr Mugleston explained: “Consider maintaining an emergency fund so you have sufficient savings available for unforeseen expenses and think about the opportunity of overpaying your mortgage against other investments.”
If a person can earn a higher return on their money elsewhere, it might make more sense to invest instead of overpaying.
Another important decision, according to Mr Mugleston, is whether to make regular overpayments or occasional lump sum payments.
Mr Mugleston said: “Some people prefer setting up a standing order for regular overpayments, while others opt to use bonuses or windfalls for lump sums.
“This really all depends on your financial situation and it’s crucial to ensure you are spending within your means.”
