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Could you overpay your mortgage?

Category: Mortgages
Author: Leanne Macardle
Updated: 26/11/2018

Mortgage rates have been at historically low levels for some time now, but the base rate started to increase in 2017 as well as more increases on the cards for 2018. Yet homeowners could continue to benefit for a while yet.

So, why not take advantage?

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

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 will probably 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, but even fixing for two or three years could be worthwhile. The number of 10-year mortgages available is also on the rise, so you could have the 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 an 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 then you can use the money you would have spent on debt 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.