Martin Lewis urges viewers to look into mortgage overpayments
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Continuous economic and political uncertainty has been wreaking havoc with the mortgage market over the past few months. Mortgage rates on a two-year fixed loan topped six percent last week, the highest rate this type of deal has seen since August 2008. While the outlook remains uncertain, those with mortgages have been exploring ways to beat interest rate hikes and reduce costs, but if opting for overpayments, it’s important to check the paperwork.
Tim Leonard, mortgage expert at NerdWallet, told Express.co.uk: “For most people with a mortgage, the events of the last few weeks are likely to have caused some concern. Even if your mortgage rate is fixed for the next few years, you might already be wondering how high rates will be by the time you need to remortgage to a new deal.”
One of the most popular options people are currently looking at is overpaying on their mortgage. In the last 90 days alone, Google searches for ‘should you overpay your mortgage’ have increased over 5,000 percent, but many are unsure what this actually means.
Mr Leonard said: “If you can afford it, you could consider making overpayments on your monthly mortgage, as long as you are certain the money you’d use to overpay definitely won’t be required elsewhere.”
“This has the potential to reduce the size of the total mortgage you’d need to take over to a new mortgage deal in the future. If you’re faced with higher rates at that point, the lower loan amount you have left could help keep your monthly payments more manageable.”
However, Mr Leonard continued: “That said, you must check your mortgage contract as there will be a limit on how much you can overpay before being hit with an early repayment charge, commonly this is around 10 percent maximum.
“If you choose to do this, again the key is making sure you won’t need the money to cover other bills that are mostly also rising right now.”
So, what exactly is a mortgage overpayment and can it save people money?
What is mortgage overpayment?
People who overpay on their mortgage voluntarily pay more than the minimum monthly repayment amount set by their lender.
Brean Horne, personal finance expert at NerdWallet said: “You may have the option of overpaying with a one-off or occasional lump sum, or with regular payments on top of your monthly payment.”
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What can overpaying on a mortgage do?
Making regular overpayments on a standard fixed-rate mortgage won’t necessarily reduce the amount a person pays in the moment, however, according to Ms Horne, it does provide two options.
She explained: “The first is that overpaying will reduce the overall term of the mortgage, meaning your monthly payments will stay the same and you’ll just pay your mortgage off over a shorter period. This will save you money in the long term, as you’ll be paying less interest, but won’t make any difference in the short term.”
She continued: “The second is that it can reduce your monthly payments over time. In the short term, small overpayments may not make a big difference, but as interest rates are often calculated daily, overpaying, even small amounts, can make a difference after a couple of months.”
Some mortgage providers also allow people to keep their mortgage payments and term the same but give them the option to make underpayments at a later date, or even borrow back later down the line.
However, Ms Horne said: “There is no standard option, so you will need to speak to your lender to see which options are available to you and to specify which one suits you best.”
People can find out how much overpaying on their mortgage could save them overall using a mortgage overpayment calculator.[link]
Whom do mortgage overpayments benefit?
It’s important to consider the long-term financial implications of overpaying a mortgage before taking action.
Ms Horne said: “With interest rates on the rise, some households may benefit more from paying off high-interest debt first, such as credit cards, for example, instead of overpaying their mortgage.
“And with the cost of living crisis escalating, some households may prefer to save prospective mortgage overpayments into an emergency fund to help with any unexpected expenses that could arise.”
Where possible, people can speak with a financial adviser to help them find the right solution for their financial circumstances.
Is anyone allowed to overpay on their mortgage?
If overpaying the mortgage feels like the right decision, it’s important people check with their lender to ensure overpayments are allowed, as not every provider does, as well as check any limits on overpayments, before going ahead.
Ms Horne said: “Your initial mortgage agreement should have all the information you need, but if anything is unclear, contact your provider for more details. From there you will be able to decide whether it’s the best decision for you.”
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