April 18, 2024


Mad about real estate

Is it right to overpay on mortgages?

With the uncertainty in the economy at the moment general advice for the public on whether to overpay their mortgages is hard to give. Many mortgage lenders have been writing to borrowers and encourage them to overpay on their mortgages so they reduce their debt and pay off the debt that much quicker. However you have got to ask yourself, why would they encourage early repayment? The answer is of course that they are looking to increase their cash reserves and also lend the money back to other borrowers at higher rates. However the benefits can mutual, depending on your circumstances.

So why should you overpay a mortgage?

The latest predictions are that house prices will actually fall further next year and therefore if homeowners overpay the mortgage they will see lower loan-to-values which is the percentage of mortgage on the property’s value. The best mortgage deals at the moment require you to put up a 40{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} deposit, a massive amount of money.

By overpaying you can reduce the outstanding amount and improve on the amount you need to borrow, which will open up better mortgage deals for when you do decide to remortgage.

Benefit of Overpaying on Mortgages

You can take advantage of tax savings by overpaying on the mortgage as opposed to saving the money. If you are a taxpayer then any money you save will be deducted at 20{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} or 40{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} depending on whether you are a basic or high rate taxpayer.

If one was to invest £20,000 in a savings account with a 3{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} interest rate then a basic taxpayer will get a return of £240 and a higher rate taxpayer will mean the return falls to £180. Compare this to a mortgage were there would be no tax deduction and a borrower would need to find a savings rate of 3.75{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} if they are a basic taxpayer and 5{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} for those high taxpayers if they are to enjoy the benefit of overpaying on mortgages.

Think carefully about overpaying on a mortgage as leaving yourself with low cash reserves will mean should you run into employment problems then you are at risk of losing your home. Decide carefully and discuss it with family before going ahead and remember to ensure there are no early repayment charge conditions for the mortgage.