According to The Money Advice Service, the average mortgage term is 25 years, however it may be that this is longer or shorter. The reasons for wanting to cut the time it takes to pay off a mortgage can vary, from the potential for spare cash in their bank each month, to saving money in terms of interest.
Regardless of why homeowners may strive to become mortgage free, there are a number of options for those who are in the financial position and who want to do so.
Cassie Stephenson, from free, online mortgage broker Habito, has shared her expertise with Express.co.uk.
“Agreeing with your lender to deliberately pay more towards your mortgage, to clear your mortgage faster, can be very good for your bank balance,” she said.
According to Ms Stephenson, this could reduce the mortgage term by a number of years – as well as meaning less money needs to be paid in interest.
“Overpaying in this way can knock several years off your mortgage, save you thousands of pounds in interest, and help you become mortgage free faster.”
So, how much can borrowers overpay?
“Most lenders let you overpay by 10 percent of the mortgage every year,” Ms Stephenson explained.
“You can see if yours does this by checking your mortgage documents.
“You can overpay either as one lump sum or by increasing your payments a little each month.
“Doing it as one lump sum might be preferable at a time like this, because it gives you more flexibility in case you need those cash savings later on, for something urgent.”
How much impact will a mortgage overpayment have?
“A mortgage overpayment calculator can show you the impact that even small overpayments can make,” Ms Stephenson said.
She went on to explain how it could affect a person, giving the example of a person with a typical £200,000 mortgage with a 25-year term, paying 2.2 percent interest.
Ms Stephenson said: “If you overpaid every month by £100, you’d save over £8,500 in interest alone and become mortgage-free three years and three months earlier.
“With most bank savings product rates being very low, becoming mortgage free faster could give your savings a better return on investment.”
However, it’s important that borrowers speak with their lender about their decision to make overpayments, and Ms Stephenson explained why.
“Make sure you speak with your lender to do this and tell them explicitly that the reason you’d like to overpay is to reduce your mortgage term,” she said.
“Otherwise, they might keep your term the same, and use your lump sum overpayment to reduce your monthly payments.
“The other big watch-out is for any early-repayment-charges or ERCs – this is a penalty fee applied if you go over the maximum repayment amount in the year, so check your terms & conditions for your specific lender’s rules on this.”
Before making overpayments, borrowers are warned to first check they’re mortgage deal.
“Like always, make sure you’ve got the best existing mortgage deal, on the lowest interest rate possible, before you start overpaying,” Ms Stephenson said.
“That way any extra money you overpay will go towards reducing your mortgage, not just lining the banks’ coffers.”
Published at Tue, 12 May 2020 09:56:00 +0000