Many of us dream of living in our home mortgage-free. Suddenly, our biggest overhead would be gone, and we’d have money to save, make home improvements, take that dream holiday – all of it! But we often hear mixed advice on whether or not it’s a good idea to pay off your mortgage early. Today, we’ll guide you through all the pros and cons of making overpayments on your mortgage so you can decide which is best for you.
When is it a good idea to overpay my mortgage? 6 Reasons to Overpay
1. If Your Mortgage is Your Only Debt
If your mortgage is your only debt, it makes a lot of sense to make overpayments to pay off your mortgage early. You have the opportunity to be debt-free in a way few people achieve. You have no other debt, so if you’re on top of all your utility payments and have a savings buffer for if something comes up, then go ahead and start overpaying your mortgage.
2. If a Major Life Goal is to be Mortgage-Free
If you have little-to-no other debt and you dream of the day you can say you are mortgage-free, then make a plan of action and start making those overpayments. Just be sure to check what your lender allows you to do before they start penalising you for your efforts and make sure you have a comfortable savings buffer.
3. If You Plan to Own Your Home for Decades to Come
Alongside becoming mortgage-free as soon as possible, it is worth making mortgage overpayments if you are planning to own your home for many, many years. After paying off your mortgage, it gives you the opportunity to live in your home debt-free so that you can focus on the important things in life. Paying off your mortgage in a home you plan to live in for many years – or even for the rest of your life – can allow you to take semi-retirement, early retirement, or even embrace a self-sustaining way of living.
4. If You Have a Substantial Emergency Fund
Don’t start overpaying your mortgage if you don’t have a substantial savings buffer. In an ideal world, you would have 3 months’ expenses in an easy-to-reach savings account, and another 9 months’ in a high-yield savings account.
At minimum, have six months’ worth of living expenses in the bank before you start overpaying your mortgage, and eliminate all high-interest debt.
5. If The Maths Works in Your Favour or You Are Outside Your Introductory Offer
Generally, most mortgage lenders won’t allow you to pay more than 10% of your mortgage balance (not the overall amount) per year, if you’re still in your “offer” period – i.e. the fixed, tracker, or discount period you chose.
After that, however, you can often pay off as much as you like. Typically, your interest rate will increase after this period, and so you really have two options: remortgage or start paying off your mortgage in a serious way.
Always read your fine print to see what rules apply to you. Some lenders will punish you for overpayments or paying it off early, so if you find your current mortgage is too restrictive, it may be worth remortgaging to a less-constrictive mortgage so you can start paying it off in earnest.
6. If You Get a Windfall
Windfalls usually come in the wake of tragedy, but whether you’ve lost a parent or won a significant amount of money, using it to pay off your mortgage is always a good idea. If you inherit or win enough money to pay off your mortgage as a lump sum it will always be worth doing. Having the security of owning your home outright will lift a weight from your shoulders you didn’t know was there.
If your windfall won’t cover your mortgage entirely, put 6 months’ expenses aside in a savings account, pay off any high-interest debt, and then make a lump sum payment toward your mortgage. Just double check you won’t be charged for paying more than 10%.
When is it a bad idea to overpay my mortgage? 4 Reasons Not To
1. If You Have Any Other (More Expensive) Debt
When you start to think about paying off your mortgage, the first thing you should do is look at your other debt. If you have (almost) any other debt with a higher interest rate than your mortgage, focus on paying off that first.
If you have a personal loan that has a lower interest rate than your mortgage (which is relatively unlikely), it’s still worth thinking about paying it off first, just so you can focus on paying off one major debt at a time.
The only debt you may wish to overlook is:
• 0% interest offers you’ve got set up to pay off before the period ends
• Your car lease if you plan to give the vehicle back at the end of your contract to get another
• Credit card debt you pay off in full each month
If you have other debt to pay off, consider using the debt avalanche or debt snowball method to gain momentum as you build toward paying off your mortgage.
(Also, don’t forget your emergency fund – always have at least three months’ expenses in the bank before you start paying off debt.)
2. If You Will Have to Pay a Fee to Make Further Overpayments
Most lenders will only allow you to overpay 10% of your total mortgage balance each year during your fixed/variable/discount term.
If you have already overpaid part of your mortgage, you may be subject to a fee if you wish to make further overpayments, depending on your mortgage agreement. Some mortgage providers will only allow you to overpay 10% of your total mortgage balance every year, and if you want to pay more than that you may incur a penalty.
If this is the case, simply put that extra money aside for the future.
3. If it Would be Cheaper to Remortgage Than Overpay
When you come to the end of your introductory offer with your mortgage, it’s usually best to remortgage. Not remortgaging will give you the freedom to overpay at will, but this won’t make sense for everyone.
If you aren’t sure you’ll be able to overpay a significant amount, then the higher level of interest may actually lead you to pay more for your mortgage than if you simply remortgaged.
You also may be able to secure a mortgage that doesn’t penalise you for overpayments over that 10% threshold, which would offer you the best of both worlds. If you’re not sure what would be best for you, our team is available to help talk you through your options and help you make the best decision for you.
4. If You May Find Yourself Dipping into Your Emergency Fund (or Worse, Using Credit Cards)
Don’t make overpayments if you can’t realistically afford them. If you start overpaying and realise you have to dip into your emergency fund at the end of the month to cover your expenses, or worse, put those expenses on credit cards, cut back your overpayments.
It’s understandable to be enthusiastic about paying off your mortgage, but don’t do it at the sacrifice of your financial stability. Remember, even just overpaying by £10 a month over 20 years could save you over £1,000 in interest.
If you’re thinking of making overpayments but aren’t sure whether or not it’s a wise decision, or whether you should remortgage first, we’re here to help. We’ll talk you through your options and, if necessary, search through all available mortgages to present you with the best one for you. To find out more about how Red Star Financial Services can help with your mortgage and to get your mortgage quote, click here.