For most homeowners the mortgage is the largest debt that they have and as such you may be considering making mortgage overpayments. You are probably asking yourself Is this a good way to reduce your debts and the cost of interest payments? In principle, most financial experts will say yes it is a good idea; however there are other factors to consider before you rush in.
A mortgage overpayment is, as the name suggests paying an amount to your mortgage lender that is more than your required monthly repayment. This could be done regularly on a monthly basis, on two or three months of the year or occasionally when funds allow such as an annual work bonus. By making an overpayment you will be reducing the amount of the mortgage debt and the amount of interest that is added onto it. Depending on how much and how often you make an overpayment, you could be looking at the prospect of saving many thousands of pounds on the total amount repaid over the term of the mortgage and paying the total balance several years earlier than the original term.
This may sound very simple and a little too good to be true. It is possible and can be simple if handled correctly and if you make a few checks to your financial situation first. With any debts that you currently have it is vital to pay off the ones with the higher interest first as these will be costing you more, loans and credit cards usually have much higher interest rates than mortgages and any additional funds that you have would be better directed to these before the mortgage.
Check the terms of your mortgage, some mortgage arrangements will have penalty charges for early payments which will obviously reduce the financial benefit of overpayments. You will also find that the majority of lenders will have restrictions on the amount of overpayment you can make whether it is a lump sum or regular overpayment 10-20% is fairly typical. Also look into the small print of how and when your interest is calculated. Some lenders will calculate annual interest and in this case the interest is being added based on the loan value at a certain date and therefore making overpayments throughout the year will have no effect on the interest charged until a full year has lapsed, monthly or daily interest calculations are much better for mortgage overpayments.
Once you have looked into your agreements, there are many websites that offer mortgage overpayment calculators which is a simple tool to work out the benefit to you based on the amount of overpayment you propose to make and your mortgage interest rates. It is also worth looking into savings accounts and ISAs as well as comparing credit card interests and those offering 0% deals, Barclays credit card is one of the many major credit cards currently offering low interest rates. These few changes will save you money and charges in other areas of your finances enabling you to free up funds to put towards your mortgage