With interest rates at an all-time low, it’s becoming increasingly common for homeowners with healthy savings accounts to pour their cash into their mortgage. By doing so, they can chip away at their debt, reduce the amount of interest they pay and become mortgage-free at a faster rate. For many people, such a move can be considered a no-brainer, but it’s important to look closely at your finances to ensure it’s right for you.
Here are just a few things to think about before using your savings to overpay on your mortgage.
Assess how flexible your mortgage is
If you’re considering overpaying on your mortgage, the first step is to determine how flexible your current mortgage deal is. Most products allow some flexibility, often enabling borrowers to overpay their mortgage by up to 10% each year. However, terms and conditions can vary between lenders. Some mortgage providers allow you to overpay a percentage of the original loan amount, while others set a limit based on the amount of debt remaining.
Although lenders are under increasing pressure to make their products as flexible as possible, some demand early repayment charges from borrowers wishing to overpay. If these charges apply to you, it’s wise to do the maths and ensure overpaying is worth it. In some cases, the charges may be larger than the amount of interest you’ll save.
Determine whether you’ll save more by overpaying than you can earn on your savings
The next step is to figure out whether you’ll save more money by overpaying your mortgage than you’ll earn in interest on your savings. If you can find a savings or current account that offers you a higher rate than you pay on your mortgage, it may be wise to keep your money within easy reach. If your mortgage rate is more than your savings rate, however, it usually makes sense to overpay.
Set an emergency fund to one side
Although using savings to pay off your mortgage can be a great way of slashing the amount of interest you owe on your loan and paying off the entire debt faster, it’s crucial that you keep some money aside for an emergency.
If you were to empty all your savings and current accounts to pour all your money into your mortgage, you may face financial difficulties in the event of an unexpected expense. From a broken boiler to job loss, a nasty surprise could leave you struggling to manage day-to-day living costs.
Most personal finance experts recommend setting aside at least three to six months worth of income for your emergency fund. This will protect you in the event of an emergency and ensure you can keep up with your mortgage repayments.
Overpaying on your mortgage can have countless benefits from saving you thousands of pounds over the course of your mortgage deal to enabling you to enjoy an early retirement.
Although this guide should give you an insight into whether overpayments are right for you, there are so many other things to consider. If you’re still unsure whether overpaying your mortgage is a smart move, it may be worth seeking the help of an independent mortgage broker. They’ll look closely at your financial situation to determine whether overpayments are worthwhile for you.
