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.
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.
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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.
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.
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.
