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Could you overpay your mortgage?

Could you overpay your mortgage?

Category: Mortgages

Updated: 15/03/2016
First Published: 29/01/2014

Mortgage rates are continuing their run of being at historically low levels, and with economic reports indicating that base rate may not rise for several months, it means homeowners could continue to benefit for some time.

So, why not take advantage of it?

Rates won't stay this way forever, and if you're currently making lower repayments - and if your budget allows - you've got an ideal opportunity to overpay your mortgage and reduce your debt before rates start to creep back up.

Find the lowest rate

To keep standard repayments as low as possible, it of course makes sense to find the lowest rate to suit your circumstances. That way you could potentially afford to overpay a significant amount each month, and could ideally drop to a lower loan-to-value (LTV) band when it's time to remortgage or move on from your initial term, which could in turn lead to better rates.

Have you fixed?

Opting for a fixed rate deal could well be the best option, particularly as rates could start to creep up over the next few years. Those with a deposit of 20%, 10% or even 5% will be able to find five-year fixed rate mortgages, and even fixing for two or three years could be worthwhile. Ten-year mortgages are also on the rise, so you could have peace of mind that your rate won't change for an entire decade.

Check the overpayment terms

Most fixed mortgages offer some kind of flexibility when it comes to overpayments, typically allowing homeowners to overpay by up to 10% of the total balance of the mortgage each year. You may have to pay a penalty if you go over this level, and if you pay off your mortgage completely you might be hit with early redemption fees, so always make sure to thoroughly check the terms and conditions of your mortgage. Those on a variable rate, meanwhile, might find there are no overpayment restrictions whatsoever, so it's always worth checking.

Savings vs. mortgage overpayments

It's worth bearing in mind that savings rates are historically low too, so you could well find that you'll save more by repaying your mortgage (and therefore reducing the amount of interest you'll have to pay) than you'd earn from interest on your savings. Or, consider the possibility of offset mortgages – the value of your savings will be "offset" against your mortgage so you'll only be charged interest on the mortgage amount less your savings. Since your repayments will typically be based on the full mortgage amount, it essentially means you're automatically making overpayments each month and could pay off the debt sooner.

Pay off debt sensibly

Another aspect to think about is which debts you pay off first. If you've got credit cards, store cards or overdrafts you'll want to repay these quicker as you'll usually be paying a much higher rate of interest, so consider paying these off first and use the money you would have spent on repayments to overpay your mortgage.

What Next?

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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