Is it worth overpaying a mortgage in the UK?

A mortgage is probably the most important financial commitment in your life. When deciding on it, you have to anticipate a number of events, such as death, birth, growth or a temporary drop in income. We like to look at the future in an optimistic way, so today we will look at one of the potentially best ways to invest your financial surplus - overpaying your mortgage. When is it worthwhile to go for it? Does it always pay to overpay?

Is it worth overpaying a mortgage in the UK?

In principle, overpaying a mortgage is a very simple process - in exchange for giving back to the bank more than the original agreement, you shorten the term of the financing. Thus, although the interest rate doesn’t change, the total amount you will come to pay back will be lower. Pure profit, right?

How does overpaying affect my mortgage?

In the vast majority of UK banks, there is one overpayment model that involves shortening the term of the mortgage. This is a very advantageous solution, because the shorter the repayment period, the less interest accumulates. Even at this stage, it is worth noting that it is best to overpay your mortgage at the beginning of the contract, but even several years after the purchase of the house, it continues to remain profitable.

How does overpaying affect my mortgage?

How much will I save?

As is often the case in finance, the answer is: it depends. After all, the profitability of overpaying depends on the interest rate on the mortgage, the repayment term, the amount borrowed or the amount of cash we can freeze. With this in mind, let’s use some examples. Remember, however, that you can also do your own calculation, for example, on the Halifax website .

How much will I save?

Low regular overpayments

Imagine a young married couple who borrowed £150,000. Shortly after the agreement, they decided to overpay their mortgage , allocating £100 every month. Originally, the term of the commitment was 20 years, or 240 months, and the interest rate was equal to 6%.

Year Amount to be repaid (without overpayment) Amount to be repaid (when overpaying) 0 £150,000 £150,000 2 £141,744 £139,200 4 £132,437 £127,028 6 £121,948 £113,307 8 £110,124 £97,841 10 £96,797 £80,409 12 £81,775 £60,760 14 £64,844 £38,613 16 £45,759 £13,650 18 £24,247 £0 The table above shows that it is worth overpaying your mortgage even by small amounts.

The total savings - assuming the heroes of our story persevered with their resolution - would be £18,280. That’s a big difference, right? With larger and longer-lasting mortgages, the savings will be even greater.

One-time overpayment

Now let’s imagine a situation where you don’t want to overpay your mortgage for many years, and you just happened to get an inheritance of £20,000. This time, our hypothetical mortgage has a value of £260 , 000, the interest rate is 6.5%, and the remaining repayment period is 25 years. How much can you save?

Year Amount to be repaid (without overpayment) Amount to be repaid (when overpaying) 0 £260,000 £260,000 2 £251,127 £228,481 4 £241,025 £215,244 6 £229,525 £200,176 8 £216,434 £183,021 10 £201,530 £163,492 12 £184,562 £141,259 14 £165,246 £115,949 16 £143,256 £87,135 18 £118,223 £54,332 20 £89,723 £16,988 21 £74,027 £0

Again, we note that overpaying is an investment with a delayed return - although in this hypothetical case, the 20 thousand you paid in year zero, this decision paid off only in the fourth year of repayment.

We must also add that our calculations assume the invariability of mortgage rates, which is, of course, a very unusual situation. In practice, the savings generated can be both higher and lower, but as a rule of thumb, a mortgage is worth overpaying even at interest rates close to zero.

When is it a good idea to overpay a mortgage?

Contrary to appearances, this procedure is not always as profitable. First of all, overpaying your mortgage is long-term - it does not affect the amount of your current installments, which means that you will feel the effects of your current effort only after several or even several years. Admittedly, giving additional sums to the bank raises your net worth and can protect you from the negative consequences of delayed installments, but you will have to wait for real benefits.

When is it a good idea to overpay a mortgage?

The situation is reversed in the case of mortgages at the finish. If you have 3-4 years left on your contract, at a relatively small cost you can save a sizable sum and feel it in the near term. Regardless of the remaining term of the financing, one thing is certain - overpaying should be considered an investment with a relatively high rate of return. Think about it yourself, do you have a guarantee that shares of listed companies or other financial instruments will not lose their value?

It seems to us that it is worth overpaying your mortgage if:

• You have a financial cushion that will allow you to survive if you temporarily lose your job or large expenses arise;

• You are ready to reap the benefits only after a long period of time;

• Your current mortgage is viable.

Disadvantages of overpaying

As we have already mentioned, the biggest disadvantage of overpaying a mortgage is the long time to wait for the profits. In most cases, it will be at least 5 years. There are also situations in which it is more profitable to invest surplus funds elsewhere - this is especially true when interest rates are low.

Disadvantages of overpaying

You also need to keep in mind the provisions of your mortgage contract - usually, there is an annual limit on overpayments, such as 10% of the mortgage value. Of course, you can overpay as much as 25% per year, but this will incur an additional fee, which will negatively affect the profitability of the whole process.

How to save even more?

Up to now, we have assumed that you stick with one bank from start to finish repaying your property. Certainly, many people do, however, there is a better way. After all, you can do a remortgage, and thus, lower the interest rate on your current mortgage. How much will you save? Even more than you originally anticipated, because you will take advantage of the advantages of both solutions:

How to save even more?

• If you have received an inheritance, for example, the money received will make the new mortgage smaller, so you will pay a lower installment right away;

• A lower mortgage rate will make the installments more favourable, so in the end, you will give less to the bank, and any overpayments can be higher (you will end up with more money left in your household budget);

• By changing banks, you will be able to choose an offer with a higher overpayment limit.

Summary

As you can see, overpaying your mortgage is definitely worthwhile, even if you will only feel the final profits after some time. Therefore, consider whether, in your current financial situation, you will be able to sacrifice additional money that will pay off in a few years.

You are welcome to contact us - the first consultation is completely free and does not obligate you to anything. We will help you choose the right mortgage that will meet all your expectations and will not overpay. Do not wait, make an appointment today!