Mortgage Guides

Mortgage overpayment – pay off your mortgage quickly and save thousands

By Hazel Cottrell hazel.cottrell@consumerchoices.co.uk

This guide shows you the best way to save thousands of pounds by overpaying your mortgage.

A mortgage can feel like a lifetime commitment. However, without a massive amount of effort or expense, you can take years off your mortgage term and save thousands of pounds. So if you have spare cash, your mortgage is a great place to put it.

If you have a tracker mortgage your monthly repayments will have dropped dramatically in the past year. In March the Bank of England base rate was reduced to a record low of 0.5% and experts say it’s unlikely to start rising until next spring at the earliest.

For you, this could be the perfect time to start making overpayments. Paying off extra capital in your house will save you an enormous amount of interest overall. In this guide we will show you the best ways to overpay your mortgage and help you avoid the pitfalls.

• What are overpayments?
• How do I overpay?
• What are the benefits of overpayment?
• Is paying off my mortgage better than saving?
• When should I overpay?
• Fees
• Access
• Underpayment
• Who lets you overpay?
• Recommendations

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What are overpayments?

Overpayments are simply additional payments that you can make on your mortgage, on top of your monthly repayments. They may be made on a regular basis or sporadically and will dramatically reduce the length and cost of your mortgage.

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How do I overpay?

There are many different ways to overpay your mortgage and different mortgage lenders will offer different options, sometimes depending on the type of mortgage you have. Ways to pay include:

• Annually – if you receive a Christmas bonus at work you could put the entire amount or a percentage of it towards your mortgage.
• Monthly/Weekly– If you think you can afford to pay a little bit extra more regularly, you could set up a standing order to transfer a small overpayment on a regular basis. This means you won’t forget to make a payment and won’t accidentally spend the cash instead.
• Variable – Some banks will let you make overpayments as and when you please, whenever you find you have a bit of spare cash. This may be good for you if you can’t afford to make regular overpayments but you do get occasional bonuses or overtime payments.

Most mortgages allow you to overpay up to a certain level – generally a fixed percentage of the amount you owe or a maximum amount per year or month.

Once you have established the type of overpayments permitted by your lender, actually overpaying your mortgage should be as simple as paying money into a bank account. You can pay by cash, cheque or online and all you’ll need is the account number and sort code for your mortgage and in some cases a reference number.

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What are the benefits of overpayment?

If you do it properly, using your spare cash to pay off your mortgage can be massively profitable. This is because the real expense of a mortgage lies in the interest you pay on it, it’s a killer. For example, an average mortgage of £180,000 with a term of 25 years at 6% will actually end up costing you nearly £348,000. That’s £168,000 of interest you will have paid over the years!

Reducing the outstanding capital on your mortgage by even a small amount will cause a great reduction in the amount of interest you will have to pay, and here is where overpayments can have a huge effect.

The following table, for the same mortgage of £180,000 at 6%, illustrates the way in which overpayments can not only reduce the interest you will pay but shave years off the length of your mortgage.

Normal monthly repayment	Overpayment	Total monthly repayment	Total amout you will save	Years you will knock off your mortgage
£1,175	£0	£1,175	£0	0
£1,175	£20	£1,195	£8,000	1
£1,175	£50	£1,225	£18,000	2
£1,175	£100	£1,275	£31,000	4
£1,175	£200	£1,375	£52,000	7

Even just increasing your payments by £20 a month will take a full year off your mortgage and save you £8,000 in the long run. If you can scrape together an extra £100 a month, over the life of your mortgage you will save a massive £31,000!

Use the Mortgage Overpayment Calculator to see what effect overpayments can have on your mortgage.

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Is paying off my mortgage better than saving?

Finacially, YES. Putting money toward your mortgage rather than in a savings account will leave you better off.

We have just illustrated how overpaying by £100 a month could knock £31,000 off your mortgage. Well, if you put that same £100 a month into a savings account instead for 21 years, even if you got a decent interest rate of 3.2%, you would only earn £10,665 interest, and that's if you're a basic rate tax payer.

It’s clear to see that the money you save by overpaying is greater than the money you would earn from saving.

Cash ISAs used to be an exception to this rule as they allow you to earn interest tax-free. Previously this meant that, on the best deals, the interest earned could outweigh the interest you were being charged on your mortgage.

For example, £3,600 of mortgage debt, at 6%, costs you £216 a year. In a Cash ISA paying 6.30% interest tax free, £3,600 would make you £226.80 a year.

However, following the recent cuts in the base rate, interest rates on all savings accounts have fallen dramatically. Finding a Cash ISA that pays interest at a high enough rate to outweigh the cost of mortgage debt is pretty much impossible.

It’s worth doing your own sums, but with current interest rates, generally overpaying your mortgage will leave you better off than any kind of savings account or Cash ISA.

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When should I overpay?

Mortgage interest in calculated in two ways, either daily or annually. For overpayments to have the greatest effect, you need to ensure that you choose, or switch to, a mortgage offering daily interest calculations. This will ensure that each overpayment you make will have an immediate effect on the amount of interest you are being charged. With daily interest calculations, the more often you make repayments the better as each overpayment will cause the interest to be reduced immediately.

Mortgages that calculate interest annually are becoming rarer, but if you are trapped with one of these then the important thing to do is time your overpayment well. Annually calculated interest means that any payments made during the year will have no effect on the interest until it is recalculated at the end of the year. It is important to find out when the recalculation date is, and then it will probably be best to put all your overpayments into a high interest savings account and make one lump sum payment at the end of the year.

If you are coming to the end of your current mortgage deal and you want to increase your mortgage payments permanently, then it may be possible to shorten the length of your mortgage if you talk to your prospective new lender. For example, if you still have 20 years left on your mortgage but you have had a large salary increase and could afford to pay more then you could get a new 15 year term mortgage with bigger monthly repayments. Watch out though – although this will save you money in the long run, changing to a shorter term mortgage means you are committed to paying the increased payments every month so ensure that you can afford to do this.

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Fees

There are two types of fees you should consider when overpaying your mortgage:

• Redemption Fee – This fee is charged when you have completely paid off your mortgage, it’s pretty much unavoidable but the redemption fees charged by different bank do vary considerably.
• Early Repayment Fees – These fees apply to people who pay off their mortgage ahead of schedule. They are becoming rarer and are only charged by certain banks and often only on certain mortgages (usually special offer fixed-rate and discount mortgages). If you want to overpay your mortgage, you need check your bank doesn’t apply these penalties or additional costs for making extra or higher payments on your mortgage. If your mortgage is restricted by an early repayment fee, it will probably be cheaper to put your cash in a high interest savings account until the terms on your mortgage change or until you are able to switch.

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Access

If you are making overpayments, you are effectively locking your money into your house and thus losing the ability to spend it if you need to in the future.

Some mortgages have flexible features which allow you to overpay and borrow back without penalties so you can put extra money into your house, but also withdraw it if you need to. If you are in this situation, you might as well put all your spare cash into your mortgage and use it like a savings account.

However, if your mortgage doesn’t have a withdrawal facility, it would definitely be advisable to set up an emergency fund before making overpayments. This fund would ideally contain enough money to live on for six months or so, in case you lost your job or other aspects of your life changed dramatically. Once this fund is set-up, you are covered for an emergency and can then spend your money on overpayments.

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Underpayment

For most people, the benefit of overpayment is being able to pay your mortgage off early and save plenty of cash, but it does have another advantage. If you make overpayments for a period of time, many lenders will later allow you to make underpayments or even take a “payment holiday”.

If you find yourself in unexpected financial difficulty or would just like a break then the opportunity to temporarily pay a reduced amount or stop making payments without falling behind on your mortgage schedule can really come in handy. Obviously, the terms vary between mortgages but it’s definitely something worth discussing with your lender.

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Who lets you overpay?

The following table shows the terms of overpayment offered by different lenders on selected mortgages. On all these mortgages, interest is calculated daily.

Provider	Product	Overpayment Options
Natwest	All Mortgages	Annual 10% overpayment option. Each year you can overpay by a maximum of 10% of your outstanding mortgage balance without incurring charges. This overpayment can be in a lump sum or several smaller payments
Halifax	All Mortgages	Annual 10% overpayment option. Each year you can overpay by a maximum of 10% of your outstanding mortgage balance without incurring charges. You can then make underpayments up to the amount of any previous overpayments.
Nationwide	Standard Mortgage Rate	Unlimited flexibility – you can overpay by as much as you like, when you like.
Nationwide	Fixed Rate and Tracker Mortgages	You can overpay by £500 per month without charge, but if you overpay by more than this there will be an early repayment charge payable on the entire overpayment amount.
Woolwich	Tracker Mortgages	You can make unlimited overpayments without incurring an early repayment charge.
HSBC	Life Time Tracker	You can make unlimited overpayments without incurring an early repayment charge.

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Recommendations

If you can afford to spare a bit of cash, either on a regular basis or just occasionally, then it really is a profitable move to make overpayments on your mortgage. Even the smallest overpayment can have a massive effect on the length and cost of the mortgage. Use the following checklist and make overpayments work for you!

• Watch out for early repayment charges and ensure that you only overpay within the limits set by the lender.
• Check whether your interest is calculated daily and if it is make overpayments as frequently as possible.
• Remember that more flexible mortgages can charge higher interest rates so always take these into consideration when choosing a deal.
• Even if a lender does not advertise the overpayment facility on its mortgage, as long as there is no early repayment fee then you should be free to make as many overpayments as you like.
• Always check the terms and conditions of your individual mortgage, read the small print and if you are unsure of your options, talk to your lender.
• For the chance to make unlimited overpayments, check out the mortgages from Nationwide (www.nationwide.co.uk), Woolwich (www.woolwich.co.uk) and HSBC (www.hsbc.co.uk).

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