If you are in a position where overpaying on your mortgage, or even paying it off in full is an option, before you go straight ahead and make the payments, take time to consider whether this is the best way to maximise your money and get your hard-earned cash working for you.
There are some mortgages, such as offset, which are designed to allow borrowers to overpay as and when then choose, with no penalties to be paid. With these types of mortgages, overpaying is often an obvious choice.
If, however, you have a repayment or interest-only mortgage, you can pay off/overpay your mortgage in a couple of ways:
Benefits to paying off your mortgage early could include:
Paying off the mortgage early is the dream for many of us, who relish the idea of freedom from this monthly payment, however, there are instances where your money could actually be working harder for you elsewhere. Reasons to think twice before paying off/overpaying on your mortgage include:
This can be a little complicated and it is best to gather all your information together and set aside some time to work through the sums.
Begin by contacting your mortgage lender to ask what the monthly interest is on your mortgage. Note that this is different from what you pay each month, as that figure includes interest and capital repayments, (unless your mortgage is interest only).
The next stage is to look at how much interest your savings are earning, and how much tax you pay on them, (don’t forget your tax-free savings amount).
Finally, compare the two figures, is your mortgage interest greater than the interest (after tax) on your savings? If yes, then the savings in mortgage interest payments will outstrip the interest you earn, making it a good decision to pay off your mortgage early.