If you wish to improve your finances, there’s no better place to start than by looking at your home loan. Not only is your mortgage likely to be your biggest household expense, it’s probably costing you tens or even hundreds of thousands of pounds in interest over the course of your term. By making changes to your mortgage, the savings could be huge.
So the question is, should you shorten your mortgage term or overpay?
Shortening your mortgage term
Decreasing the term of your mortgage allows you to clear the loan faster. You’ll also pay less interest, potentially saving thousands of pounds over the course of your mortgage.
In some cases, shortening your mortgage term can see you making higher mortgage repayments each month than you do currently, but if you have a substantial sum in savings and you use this to pay off a chunk of your mortgage, you may be able to lower your payments as well as the term.
In order to shorten your mortgage term, you’ll need to remortgage your property. Remortgaging can be a great way of accessing more suitable mortgage deals and finding a lower interest rate in the process.
Overpaying your mortgage
Overpaying your mortgage has the same effect as shortening the term in that it allows you to pay off your loan sooner. However, overpaying can come with an added benefit - flexibility.
Borrowers sometimes have the freedom to stop and start overpaying if and when they want. For example, you may choose to overpay by £100 one month, £35 the next month and not overpay at all the month after that.
Will you face penalties for overpaying?
Most lenders allow borrowers to overpay by 10% of their outstanding mortgage balance each year. Therefore, if you still owe £100,000, you can overpay by up to £10,000 annually. Some lenders calculate it as 10% of the total mortgage balance from the day you took out your loan and others have different rules entirely.
Check with your lender to find out whether there are any rules or restrictions in place. Some will prefer you to consistently overpay a certain figure by direct debit and may discourage regular alterations. While lenders are increasingly under pressure to provide customers with flexibility, there are some that will charge financial penalties for overpaying.
What difference can overpaying make?
If you had a mortgage debt of £150,000 over the course of 25 years at an annual interest rate of 3.5%, your mortgage repayments would be £751 a month. If you started overpaying by £100 a month, you’d be mortgage free 4 years and 4 months earlier. This would save you a whopping £14,396 in interest over the course of your mortgage.
Even if you were only to overpay by a small figure each month, you’d still save yourself money and pay off your debt sooner. For example, if you were to overpay by £10 a month rather than the £100 in the example above, you’d save £1,751 in interest alone and pay your mortgage off 6 months earlier.
