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Is It Better to Pay More on a Mortgage or to Save?
At first glance, it might seem strange for anyone to choose to make higher repayments on their mortgage than required, but a moment’s thought shows the possible advantages. However, it’s not always the best use of your money.
Why Should You Overpay on Your Mortgage?
If you pay off your mortgage sooner than necessary, you’re saving on the interest you would have been charged over a longer period. This is essentially equivalent to be paid interest if you’d put that extra money into savings, instead — with one crucial difference.
At the moment, interest rates on savings accounts are close to a record low. Mortgage rates, in fact, aren’t very high either, but they’re considerably more than savings interest. This is actually always true. Whether we have a base rate of 0.75% or 15%, you’ll always get less from your savings than you’ll have to pay for your mortgage.
For instance, if you have a spare £10,000, investing it in a savings account that offers 0.5% interest will earn you a mere £50. If, on the other hand, you pay it into a mortgage with a 5% rate, you’ll be saving £500. It’s a no-brainer — or is it?
What Problems Might You Have from Overpaying on Your Mortgage?
Depending on what type of mortgage you have, there may be penalties on early repayment. This is most likely to apply to fixed-rate mortgages, which typically have a ceiling of 10% of the sum owed. If you overpay more than this, you may be charged anything from 1% to 5% of what you’ve paid, which could largely negate the benefits.
In general, this doesn’t apply if you have a Standard Variable Rate (SVR) mortgage, and you can overpay as much as you like without penalties. However, since the rates for SVRs tend to be considerably higher than fixed rate mortgages, you’re likely to be worse off in the long run.
It’s important to check the terms of your mortgage, though. The 10% rule isn’t universal for fixed rate mortgages, and some lenders might start penalising at a lower rate.
What’s the Best Strategy?
Before considering overpaying on your mortgage, it’s worth considering repaying any loans outstanding with a higher interest rate or a maxed-out credit card. Otherwise, read through the terms of your mortgage carefully to find out how much you can overpay without penalties.
Alternatively, you may be able to switch your mortgage and ensure you get the best possible terms. Why not check out how we can help you with that? Click here to learn more and how it works.
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