Is it better to overpay mortgage or reduce term?

June 27, 2021
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If your financial situation changes over the course of your mortgage, you might find yourself with more disposable income at the end of the month than expected. The question of saving or spending is one that divides financial advisors, but there is another option to consider. Overpaying your mortgage can help you to clear the balance faster and reduce the amount you pay overall.

In this guide, we’ll break down the options available to you to overpay your mortgage, and how this can help you when the time comes to remortgage or purchase a second home.

What are the benefits of mortgage overpayments?

There are three main advantages to mortgage overpayments. These are:

  1. You will pay less interest
  2. You can lower the mortgage term
  3. You can save money in the long term

Mortgage overpayment quickly turns into significant savings. For example, paying an additional £100 per month on a £100,000 mortgage over 25 years with a 4% interest rate will reduce your mortgage term by 6 years and save you over £15,000 in interest.

Remember that some lenders charge you for early repayment, so make sure you factor this into your affordability calculations.

Is it better to overpay mortgage or reduce term?

If you're trying to decide between the option to overpay mortgage or reduce term, you might be surprised to learn that both will achieve the same outcome. The only difference will be that reducing the term will increase the minimum required payment every month. With overpayment, you have a choice to skip a month, reduce your overpayments or increase your overpayments. This keeps things flexible and allows you to take control of your finances.

If your situation changes or if you need a little extra cash one month, you’ll have the option to stop overpayments without consequence. For example, if you have a baby and need extra money to spare every month, you can stop your overpayments. But if you get a pay rise at work, you can add a little bit more to the mortgage pot every month. If you make changes to the mortgage term, you can change the structure of the mortgage and this offers less flexibility.

How to make overpayments

If you are interested in making additional payments every month, you will need to speak to your lender. You may have a limit to the amount you can overpay every month, or you may face fees to make overpayments. If you pay off your mortgage before the end of the fixed term, they could also be fees due. Always check with your lender to find out how to make over payments and how to ensure you don't face any fees.

If you aren’t sure if overpayments are right for you, or if you have a mortgage that doesn’t allow overpayment, get in touch with Niche Mortgage Info. We can help guide you to choose the right mortgage products for your needs. You may need to remortgage or do a product transfer to make it possible to overpay your mortgage.

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