NEW Years Resolution – Overpaying your mortgage while interest rates are still low makes far more sense than saving
You may be about to start a diet, or quit booze or chocolate . Or perhaps you’ve resolved to start a new hobby, or write a diary.
It’s more than likely that many of these resolutions will be short-lived and soon forgotten. But there is one financial vow you should make that could not only save you thousands today — but for years to come.
Overpaying your mortgage while interest rates are still low could save you a fortune. It can be far more valuable than squirrelling money away into a savings account.
It’s a highly efficient way of making your cash work hard.
Although you won’t have as big a nest egg if you overpay your mortgage, the money you save on mortgage interest should by far outweigh what you earn on your savings.
If your mortgage interest rate is 4 per cent and you’re a basic-rate taxpayer, you’ve got to find a savings deal paying 5 per cent before tax to match the benefit you would get by overpaying on your home loan. So let’s have a look at what you could save …………
Cutting your mortgage balance now, while rates are low, will only make life easier when interest rates rise in the future.’
So how do you do it? To begin with, you need to remember that overpaying should not come at the expense of saving. You’re still going to need some spare cash as rainy day money.
If you’ve got this already, then you can start paying off your mortgage.
Overpaying every month is as simple as making a standing order payment to your mortgage lender. Or you could put it into a savings account and pay it back at the end of the year.
After each payment, your lender should recalculate your debt. However, some banks only calculate your interest annually, so anything you overpay won’t register until this sum is done once a year.
There are some other things you need to be aware of. First, make sure you are not going to be hit with any charges for overpaying on your mortgage.
Most lenders will let you overpay by up to 10 per cent of the value of the loan each year without any charges — so if you have a £200,000 mortgage you can pay back £20,000 a year. But check the precise terms from your lender.
You can make larger repayments without penalty if you are on your bank’s standard variable rate, on a lifetime tracker or between fixed-rate deals.
You should also ensure that any overpayment you make goes to reduce the debt (so shortening the mortgage term) rather than simply reducing your monthly payments.
Another point worth considering is that, unlike a savings account, once you put money into your mortgage you can’t get it back.
That means you should consider whether you might need the money at a later date.
Timing is important. The benefits of overpaying your mortgage now are at an optimum level because interest rates are so low, but if they start to rise next year, as predicted, you may have less spare cash to play with.
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