With the cost of living soaring and mortgage repayments rising, making additional payments on your home might be the last thing on your mind. Yet, if you’re in a position to do so, it may cut the cost of borrowing over the long term.
To tackle rising inflation, the Bank of England (BoE) has increased its base interest rate from historic lows to 5.25% as of November 2023. This has had a direct effect on the mortgage repayments of many homeowners and your own outgoings may have increased as a result.
In October, the Bank’s Monetary Policy Committee opted to hold interest rates despite inflation falling sharply.
The Guardian reports that BoE governor Andrew Bailey said it was “far too early” to consider cutting interest rates. Indeed the Office for Budget Responsibility forecasts that interest rates may remain around their current level until 2028.
While higher interest rates could place your budget under pressure, they could also mean there’s even more value in overpaying your mortgage if possible. Read on to find out why.
3 financially-savvy reasons to overpay your mortgage
1. You could be mortgage-free sooner
One of the reasons you might consider overpaying is to be mortgage-free sooner. It could ease the pressure on your budget in the future and mean you can focus on other goals. A mortgage is often the largest loan you’ll take out, so paying it off can feel like a real accomplishment and improve your wellbeing too.
2. You will reduce the amount of interest you pay
The interest added to your mortgage is calculated as a percentage of your loan. When you make an overpayment you’re reducing the outstanding value of the loan, so the interest added in the following months will be lower. As a result, overpayments could save you money overall and it may be even more valuable when interest rates are higher.
3. You could benefit from greater flexibility
Overpaying your mortgage could mean you have more options in the future. For example, if you need to take a repayment holiday because your income has unexpectedly stopped, you may be able to pause your repayments because you’ve overpaid in the past.
How overpaying your mortgage by £200 could save you thousands
As overpaying will affect the interest added to your mortgage, it could reduce the total cost of borrowing by more than you expect.
Let’s say you borrowed £200,000 through a repayment mortgage with a 25-year term. If you had an interest rate of 5%, your regular repayment would be around £1,170 each month. Assuming the interest rate remained the same, you’d pay more than £150,000 in interest over the full term.
Now, if you paid an additional £200 each month, you’d be mortgage-free six years and two months sooner. What’s more, you’d save more than £40,000 in interest alone.
So, making an overpayment could make sense financially when you look at the long-term outcomes.
Check if you’ll face a fee when overpaying your mortgage
In most cases, you can pay off up to 10% of the outstanding value of your mortgage each year without incurring a fee. However, this isn’t always the case, so it’s worth reviewing your mortgage contract.
If you could be charged a fee, you might want to calculate how it compares to the interest you’d pay without making the overpayment. It might still be worthwhile financially.
Contact us if you’re searching for a new mortgage
If your current mortgage deal has come to an end, searching for a new one could help you access a more competitive rate of interest. We may help you find a mortgage that suits your needs, including the flexibility to overpay if you’re keen to reduce your mortgage debt quickly.
Please contact us to arrange a meeting to talk about your mortgage needs.
Please note: This blog is for general information only and does not constitute advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
