Mortgages are one of the biggest financial commitments many of us take on, and the total cost can feel overwhelming. But experts say there is a way to cut down on how much you pay overall. Jonathan Bone, Head of Mortgages at online broker Better.co.uk, has broken down what mortgage overpayments are, how they work, why they could save you money, and what’s happening in today’s mortgage market.
"Reducing your payment will mean the overall length of your mortgage remains the same, but your obligated payment reduces. Alternatively, overpayments that reduce the term will retain the same monthly payment but reduce the mortgage term. Both options will save you money in the long run, but reducing the term will do so more effectively. The downside is that your monthly commitment hasn’t reduced.
“The more expensive your mortgage is overall, the more you’ll be likely to save by making overpayments. However, this doesn’t mean that those with smaller mortgages should rule out making them. For example, someone with a £250,000 mortgage and a 25-year term paying a 5% interest rate could save nearly £15,000 in interest by overpaying just £100 extra per month. Those savings are still impactful, no matter the size of your mortgage.
“Higher interest rates mean you’ll save more in interest payments by overpaying. This is because a larger portion of your monthly repayment goes toward interest rather than the principal loan amount. For example, at a 6% interest rate, every extra pound you pay works harder at reducing the total cost than it would at a 3% rate.
“Overpayments also offer flexibility for the future. By reducing your outstanding debt, you might be better positioned to take on other financial commitments, such as loans or investments, later down the line."“On the flip side, some lenders charge early repayment charges if you overpay beyond a certain limit, usually around 10% of the balance per year. Make sure to check with your lender first to avoid being penalised for overpayment.