Homeowners can save thousands of pounds on their mortgages by overpaying their loans by just £100 a month, but there are certain factors to consider first, an expert has said.
Tom Blake, director at Money Saving Guru said: “One of the main benefits of overpaying your mortgage is reducing the amount of interest you will pay.
“Mortgages will typically accrue a large amount of interest over the years, but by overpaying your mortgage you can reduce the amount of extra cash you will have to fork out and reduce the length of time you’ll be paying.”
For example, Mr Blake said: “If you have a £200,000 mortgage at a five percent interest rate with a term of 25 years, an overpayment of just £100 a month can save you approximately £24,500 in interest and shorten your mortgage term by over three and a half years.
He added that this is a “significant saving” that’s “worth the effort” of putting some money aside every month.
Beyond the interest savings, overpaying a mortgage can give people peace of mind.
Mr Blake said: “Allowing you to own your home outright sooner and have a solid sense of financial security. Plus, once your mortgage is paid off, you’ll have far more disposable income each month, which you can then use for other financial goals such as saving up for your retirement, popping into a pension pot, or saving up for a holiday.”
However, there are certain factors people should take note of before making the decision to overpay their mortgages. First and foremost, Mr Blake said: “A big thing to consider before overpaying is whether your mortgage agreement has an overpayment limit.
Some lenders will impose limits and even penalties when it comes to overpaying, meaning you might end up out of pocket overall if you don’t read the fine print.
“If you’re not sure, it’s best to speak to your lender before making any payments.”
Additionally, Mr Bake said people should balance the benefits of overpaying a mortgage with their current needs before signing up for anything.
He explained: “While it can be beneficial in the long term, if you’re only going to save a year or two off of your mortgage term, but are struggling every month to put the money together it’s better to see out your term in full.”
How much can you save by overpaying your mortgage?
The amount a person can save will vary depending on the interest rate, how much they can afford, as well as limits on how much they can overpay. However, Mr Blake said: “Even minimal amounts are worthwhile”.
Mr Blake said: “If you can only afford to overpay £50 a month, for a £200,000 25-year mortgage with a five percent interest rate, this could save you £13,430 in interest alone, and clear your debt just shy of two years earlier.”
Mr Blake shared a few more examples of the impact of overpaying £100 on 25-year mortgages with five percent interest rates:
- £250,000 loan – Save £25,410 in interest and clear mortgage two years and 11 months earlier.
- £300,000 – Save £26,030 in interest and clear mortgage two years and six months earlier.
- £350,000 – Save £25,450 in interest and clear mortgage two years and two months earlier.
- £400,000 – Save £26,4860 in interest and clear mortgage one year and 11 months earlier.
- £450,000 – Save £27,150 in interest and clear mortgage one year and eight months earlier.
- £500,000 – Save £27,380 in interest and clear mortgage one year and six months earlier.
Overpaying by a larger sum can unsurprisingly double the savings. Here are some examples of the impact of overpaying £250 on 25-year mortgages with five percent interest rates:
- £250,000 – Save £52,350 in interest and clear mortgage six years and two months earlier.
- £300,000 – Save £55,030 in interest and clear mortgage five years and four months earlier.
- £350,000 – Save £57,120 in interest and clear mortgage four years and nine months earlier.
- £400,000 – Save £58,790 in interest and clear mortgage four years and three months earlier.
- £450,000 – Save £60,170 in interest and clear mortgage three years and 10 months earlier.
- £500,000 – Save £61,330 in interest and clear mortgage three years and six months earlier.
