Monday, 27 July 2015

Overpay, offset or save. Say goodbye to your mortgage a bit quicker

Most of us can't afford to buy a house outright and require lending from a bank which comes in the form of a mortgage.

So you sign on the dotted line and they tell you they are taking x amount of money for y amount of years but unless you ask most people aren't aware that they can make overpayments on your mortgage. 25/30/35 years later they celebrate when it's paid off. But what if you choose to overpay.

Why would you do this I hear you ask! Well in general loans, are repayed back by looking at the total amount to repay them including all interest divided it by the number of payments.

Put really simply, as there's lots of complicated maths that the banks do but I can't do! If all things stayed the same, a mortgage of 10 years including all interest for the ten years came to £120,000 in total you will be paying £1000 per month.

But what if after 1 month you made an overpayment, that would mean that you would be paying interest on a smaller amount than the bank first calculated. This would result in a shorter term or less to pay each month. Say then you did this in month 2,3,4 as well. The snowball effect of the overpaying could result in taking years off the mortgage length.

First thing to do though is to check the terms and conditions regarding over payments as they vary a lot with different providers.

Some have unlimited, some a fixed amount some a percentage of the loan, or a percentage of the monthly payment. Check out what you can do and then don't pay 1 penny more as the fees for doing this can be extortionate.

That said if your overpayment allowed level is low or you don't know if you want to totally tie up the money you can take advantage of the low mortgage rates and find a higher savings rate to create your own saving/offset account.

Some mortgage companies do offer offset accounts as part of the mortgage package but if not create your own and then save it up to pay off your mortgage earlier.

Personally I like to overpay as I don't want to be able to get my hands on that money again. I set myself a monthly target of payments to make on top of my regular payment. Sometimes I hit it sometimes I don't! What I do know is that in 10 years tops I will be mortgage free and if I didn't overpay I would still be paying in 20.

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