Many home owners consider their mortgage will be a part of their life for 25 years or more and are content to pay the minimum monthly payments. However there is a way to save thousands of pounds and be mortgage free sooner than you expect.
In this article we will show you that over paying your monthly mortgage payments is one of the best investments you can make. You can literally save thousands of pounds!
How mortgages work
A repayment mortgage is designed to pay off both the principle (the amount owed) plus interest on the principle over a set term. You meet these requirements by paying monthly mortgage payments.
So if you take out a £100,000 mortgage over 25 years, the bank will calculate your monthly payments so that you are paying off a small amount of the principle plus the interest due in each monthly payment.
Towards the start of your mortgage your monthly payments only pay off a very small part of your principle – most of the monthly amounts cover interest – but as you progress through the term, you pay off a greater percentage of your principle in each mortgage payment.
As interest rates change, the monthly interest payments change too, unless you are on a fixed rate mortgage, but you still pay off a small part of the principle each month.
Why overpaying your mortgage is so good
Any overpayment that you make, directly reduces the principle and so either reduces the mortgage term or the amount that you owe each month, because you now owe less interest.
Any over payments directly reduces your debt and as you are charged more interest for a mortgage than you receive in a savings account (particularly with having to pay tax on interest), you become better off as a result.
Lets look at some figures
If you have a £100,000 mortgage with a 6pc interest rate taken over 25 years, see how overpaying can save you money
|Over Payment||Monthly Payment||Time Saved||Interest Saved|
|£50||£694||3 yrs 8 months||£15,842|
|£100||£744||6 yrs 4 months||£26,893|
|£150||£794||8 yrs 4 months||£35,038|
|£250||£894||11 yrs 3 months||£46,333|
|£500||£1,144||15 yrs 4 months||£61,406|
So you can see that you are saving huge amounts of interest by paying just £50 extra each month. You also become mortgage free much more quickly!
Things to look out for
If you want to benefit from these very large savings then you should discuss this with your mortgage lender, however there are a few things to look out for before making any mortgage overpayments:
- Check that overpayments are allowed. Most lenders do allow an over payment without incurring early redemption fees. The Nationwide, for example allows you to pay overpay by £500 per month.
- Check that there is no minimum overpayment stipulated. Some lenders set a minimum payment so if you pay less than this it just sits in their bank account without being credited to your mortgage account.
- Check that the lender calculates your interest daily and reduces your mortgage and interest on the day when your overpayment is paid to them. Most lenders do have daily interest calculations, but its always sensible to check before selecting a mortgage provider.
And finally a word of warning
This article has shown that you can save thousands of pounds by overpaying your mortgage. Its a good investment and is probably a better place for any spare money than in a savings account, as long as you have sufficient savings to meet everyday and unexpected needs.
However if you have other unsecured borrowings such as credit cards which are costing you, say 14pc interest, then you should always reduce these debts first.
Always try and pay off the debts charging you the highest interest rates first. This makes sound money sense and increases your personal prosperity.