Paying off a mortgage can feel like a never-ending burden. Overpaying your mortgage, though, can save you thousands of dollars in interest payments over the loan term. This article will show you how making extra payments can help you pay off your home faster and save money.
Benefits of Overpaying Your Mortgage
Overpaying your mortgage helps you save on interest costs over time. It also allows you to pay off the loan faster.
Reduced interest over the life of the loan
Overpaying your mortgage reduces the interest you pay over time. By paying a bit more each month, like $100 extra, borrowers can save tens of thousands in interest on a 30-year mortgage.
Interest is calculated daily on most mortgages. Extra payments lower the principal balance sooner. This means less interest gets added next day and for every day after that. These savings add up quickly, helping reduce your overall debt faster.
Quicker payoff of principal amount
Paying off your mortgage principal faster can save you a lot of money. By making extra payments, you reduce the overall amount on which interest gets calculated.
For example, if you have a tracker mortgage reserved after May 2, 2014, there’s no limit to how much extra you can pay each year. This means that with enough overpayments, “you could cut down many years from your loan term,” according to financial experts. If your loan started between February 1, 2001 and May 28, 2013 though, you're limited to paying £500 more per month.
Extra payments also provide flexibility in managing future expenses. By reducing the principal faster now instead of later, you'll owe less in monthly payments moving forward even if rates rise or personal circumstances change.
Comparing Overpayment vs. Saving
Overpaying your mortgage can save you a lot in mortgage interest rate but so can smart savings. It’s crucial to compare current mortgage rates and savings rates before making a decision.
When it's better to overpay than to save
Overpaying your mortgage can be better than saving when your interest rate is low. For example, adding $100 more to your monthly payment can reduce the loan term and save thousands in interest.
Extra payments build equity faster, which helps with future borrowing or selling the property.
Consider using windfalls like bonuses or tax refunds for additional mortgage repayments. Doing this increases the total value of your home quicker. It also reduces overall mortgage debt by cutting down on lengthy interest costs from standard variable rate loans.
Impact of mortgage and savings rates on decision making
Deciding whether to overpay your mortgage or save money depends heavily on current interest rates. If your mortgage rate is higher than savings account rates, overpaying can be more beneficial.
This reduces the loan principal faster and lowers overall interest mortgage overpayments.
However, if the savings rate exceeds the mortgage rate, putting money into a high-interest savings mortgage account number might make more sense. Always check with your mortgage provider for any penalties related to early repayment charge.
Consulting with financial advisors from Revolution Brokers can help align this decision with your broader financial goals.
Conclusion
Overpaying your mortgage offers great benefits. It reduces your interest over time and helps you build equity faster. Even small extra payments can save you thousands of dollars.
Check with your mortgage lender about any penalties for early repayment charges first. Your future self will thank you!
FAQs
1. Should you overpay your mortgage?
Overpaying your mortgage can reduce your overall debt, lower the rate of interest, and shorten the loan term.
2. What happens if you overpay your mortgage?
When you overpay, more money goes toward reducing the principal mortgage balance. This decreases future interest payments and can improve your loan-to-value ratio. You could also use your saved money to make a lump sum overpayment.
3. How do tracker mortgages affect overpayments?
With tracker mortgages, any extra payments will reduce both the principal and interest owed since these loans follow a variable rate of interest.
