04 Nov 2019 Homeowners could be mortgage free sooner than they initially planned thanks to flexible mortgages that allow borrowers to overpay each month.
Data from Yorkshire Building Society shows a fifth (23%) of borrowers are in credit on their mortgage after making overpayments on their account.
For some, overpayments can be a way to pay off their mortgage sooner than they had originally planned; potentially reducing the amount of interest they pay over the term of the mortgage.
For others, regularly repaying more than the fixed monthly amount can help to pre-empt an expensive period in the future that could allow a payment holiday – an agreed temporary break in repayments – if the mortgage account is in sufficient credit.
Charles Mungroo, Senior Mortgage Manager at Yorkshire Building Society, said: “While it’s great to see so many borrowers value the option of managing their mortgage flexibly, it’s really important people understand the facts and implications of making overpayments to decide if it’s right for their circumstances.
“For example, while it could help reduce the amount of interest you pay, you can’t retrieve an overpayment if you need the money back. Likewise, it may mean you can pay off your mortgage quicker but if done wrong, could mean you incur fees. There’s a lot for borrowers to weigh up.”
Typically, lenders allow borrowers to overpay by up to 10% of the total outstanding mortgage balance each year either through regular, smaller overpayments each month or a larger one-off deduction when circumstances allow, for example receiving an inheritance.
However, borrowers unwittingly paying any more than the allowance would likely trigger early repayment charges (ERCs) on the overpayment, the amount of which varies depending on the terms of the mortgage.
For example on a £200,000 mortgage, borrowers could overpay an extra £20,000 each year before they would incur any financial penalty, but a miscalculation could see the mortgage holder charged a percentage of any additional payment over the agreed limit.
Charles added: “If your mortgage terms allow overpayments and you can afford to make any additional contributions, no matter how small, over time you could really start to see some benefit.
“However, taking on a mortgage is likely to be one of the biggest financial commitments you will make in your life so it’s essential you understand all the facts before making use of flexible features on your mortgage to help you manage your finances in the future.”
To help borrowers understand how overpaying on their mortgage could help them, the Yorkshire has launched a new calculator that enables them to quickly and easily see how even the smallest overpayments could reduce the amount of interest they pay and how much sooner they could be mortgage free.
The Yorkshire is offering tips for borrowers to consider before making overpayments:
1. Do your research: Always check your existing mortgage deal to understand the terms of your mortgage and find out any potential fees that may be applied in the event you pay off your mortgage early. Most mortgage providers will allow you to overpay by a certain percentage (usually 10% but this will vary between different lenders and depend on the type of mortgage you have) and if you go over this amount, a charge is applied.
2. Speak to your lender: if you think overpayments could work for you, speak to your mortgage provider to find out if this is something you could make use of, and on what terms. They know your mortgage better than anyone else so will be able to discuss your options with you.
3. Clear any debt: Typically the interest charged on unsecured debt, such as loans and credit cards is more than that charged for a mortgage – so it’s a good idea to try and pay existing debts before you begin to overpay on your mortgage.
4. Are your savings paying?: If the interest rate you earn on your savings is higher than the interest rate charged on your mortgage you might be better leaving it where it is, than overpaying on your mortgage.
5. Don’t run on empty: Before committing any spare cash or savings to overpayments, make sure you have enough in reserve to support you in an emergency, such as boiler repairs or car breakdown. Once it’s used as an overpayment, you can’t get the cash back.