and save thousands
For many people, paying off their mortgage early seems little more than a dream – a monumental task that simply isn’t practical.
What most people do not realise however, is that with very little effort or expense, it is often possible to shave years from the term of your mortgage – simply by making occasional, small overpayments. This will save you thousands in the long run.
Here’s Your Full Guide
Overpaying – What Is It?
Overpaying is simply the name given to making additional capital payments on your mortgage, over and above the required monthly payment. Overpayments can fall into several categories:
- Regular overpayments
- Irregular/occasional overpayments
- Variable overpayments
For example, you could overpay by a fixed amount each month, using a standing order. Or you could pay in the entire amount of your annual bonus each year – however much it might be.
Different mortgage lenders have different policies, but most of today’s mortgages allow you to overpay up to a certain level – typically a maximum amount per month or year, or a fixed percentage of the amount you owe.
This overpayment should be deducted from the capital amount (the amount you borrowed) – not from the interest you owe.
To read more on this subject please see the list below or your mortgage guide or your home buying guide
Why Overpay?
Well it’s all about the interest
The size of most mortgage loans and their standard 25 year term means that the amount of interest paid back over a 25 year period is much greater (2 to 4 times) than the amount originally borrowed.
Reducing the outstanding capital by even a small amount causes a much larger reduction in the amount of interest paid than you might expect.
For example – an overpayment of just £25 per month, every month, would be enough to result in a significant reduction in the length of your mortgage, especially if you were in the first half of your mortgage term.
How To Overpay on Your Mortgage
In principle, overpaying on your mortgage is as simple as paying money into a bank account – whether by online payment, cheque or cash.
All you need is the account number and sort code for your mortgage, and possibly a reference number.
If you aren’t sure what these are, your mortgage lender will be able to tell you.
In practice, you will also need to check with your mortgage lender to see what kind of overpayments they allow.
There might be some restrictions on:
- Overpayment frequency
- Overpayment amount
- Number of overpayments per year
- Annual or Daily Interest?
Mortgage interest is calculated in one of two ways: Daily OR Annually
It is very important to know which type of mortgage you have. The majority of mortgages now work on a daily interest basis, which means that the interest on the loan is recalculated every day. This means that once an overpayment has been made, the amount of interest due reduces immediately.
Annual interest mortgages are less popular and mean that payments made during the year will not “count” until the interest owing is recalculated at year end. (See the mortgage calculator on difference between paying interest daily vs yearly)
If your mortgage has annually-calculated interest, you should discuss overpayment possibilities with your lender – it may be best to put your overpayments into a high-interest savings account and then simply make one payment into your mortgage at the end of the year.