Once you have checked on your mortgage’s overpayment policy, you are ready to get started.
To get maximum benefit from your overpayments, it is important to plan your approach.
First of all, decide how you will be overpaying:
- Monthly/Weekly/Annually, fixed amount
- Monthly/Weekly/Annually, variable amount
- Irregular schedule, variable amount
These are the three main possibilities for overpayment plans, and you will probably find that one of them suits you better than the others.
For example, if you can’t afford to make regular overpayments but you do get occasional bonuses or overtime payments, you might want to decide to always pay these into your mortgage, as soon as you get them.
Alternatively, you might want to pay just your annual bonus into your mortgage each year, or you might decide to make a small overpayment on a fixed weekly or monthly schedule (the best way to do this is to setup a standing order from your bank account so that you won’t forget to make the overpayments or accidentally spend them instead).
Remember – if your mortgage has its interest calculated daily, the more often you make overpayments the better – paying 25% of your monthly overpayment each week will shorten your mortgage more than making one overpayment monthly, because the interest will reduce after each weekly payment – rather than only reducing once each month.
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Overpayments: Other Things To Consider
Once you are comfortable with the idea of overpayments and have made some decisions about what you can afford and when, you might want to plan a little further ahead – especially if you are determined to completely pay off your mortgage as early as possible.
Here are a few more things to consider.
Fees & Remortgaging
We all know that mortgage lenders love nothing more than fees, and sadly these even apply to good borrowers who are paying back their loans early.
There are two types of fees that might apply to people who are overpaying on their mortgages:
Redemption Fee – this is the fee you pay after you have paid off your mortgage – regardless of whether you have paid it back early. Can vary considerably in amount but is usually unavoidable.
Early Repayment Fee – as the name suggests, this fee applies to people who have paid back their mortgage ahead of schedule. They vary widely, and may not always exist, especially if your mortgage is on a lender’s standard variable rate.
If you have a fixed rate or tracker mortgage, however, you will almost certainly be eligible for early repayment fees if you finish paying back the mortgage during the fixed or tracker period.
Although it is not normally possible to avoid mortgage redemption fees, early repayment fees can usually be avoided with a little planning, and this can be very worthwhile.
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Here are some suggestions to get you started:
1. If you are remortgaging and are within a few years of paying off your mortgage, make sure you understand the different redemption and early repayment fees.
Ask your mortgage broker to work out whether a mortgage with a slightly higher interest rate but low/no fees might save you money.
2. Plan how long you think it will take you to pay off your mortgage – with regular overpayments this should be possible.
Use this knowledge to try and make sure you are not at the beginning of the fixed or tracker period of a mortgage when you finish paying your it off – the repayment fees will be highest at this point.
3. If you are considering remortgaging, discuss your plans and calculations with an independent broker who will be able to compare the fees and interest rates of a number of different mortgages and find the cheapest solution for you.