Yahoo! Finance seeking mortgage experts

ended 28. November 2021

A journalist at Yahoo! Finance is writing an article on mortgage overpayments. Her Qs are:

  • Is now a sensible time for people to overpay their mortgage?
  • What restrictions, if any, do lenders put in place in relation to overpayments?
  • Can borrowers be penalised for overpaying too much?
  • What are the general pros and cons of overpaying?

You know the drill by now. Power Rangers Combine! Deadline is Sunday night, so maybe do it after Songs of Praise.

9 responses from the Newspage community

Star Quote
"The question of when to overpay a mortgage is a tricky one. While looking at numbers alone might suggest it is better to leave a long- term, low interest loan to run its course whilst you invest in products with better returns, this ignores the very personal feelings each of us have towards debt. The relief of reducing a debt can make a massive difference to an individual's outlook and wellbeing. "Most lenders will allow you to overpay (and reduce the capital owed) by 10% of the balance of the mortgage when locked into a fixed rate. Any payments beyond this will normally attract a penalty, usually expressed as a percentage of the amount you overpay by. "The pros of overpaying are that you will end up paying less interest over the life of the mortgage, while reducing the time it takes to clear the debt. The cons might be that, with some prudent financial advice, you may be best to leave the mortgage alone and seek returns that outweigh the interest charged."
Star Quote
"Now is a great time to be overpaying on your mortgage. But guess what? Now is also a great a time not to be overpaying your mortgage. Why? Simple: it all depends on what your personal financial strategy is and whether reducing debt, investing for the future, or a balance of the two is right for you. There is no one size fits all. It is also important to consider how much cash you have available; is it a small amount of surplus income each month, or do you have a lump sum to hand? These questions demonstrate the value of working with a financial professional to create a strategy that's right for you, to meet your personal needs, goals and ambitions. "One view could be that interest rates are historically low, so making mortgage overpayments would be a great idea because, instead of your hard earned cash paying off interest to the lender, you will reduce capital balance (or actual mortgage debt) faster. "Another view might be that, because interest rates are so low, it doesn't make sense to reduce the mortgage debt because it's 'cheap borrowing'. A person holding that view might decide to speak to a financial adviser with a view to investing for longer-term capital growth or income. "Overpaying a mortgage, either regularly or by lump sum, can offer fantastic benefits such as a reduced payment going forward, or slice years off the term, but it's important to look at the wider picture before making a decision."
"Now is a great time to start overpaying on your mortgage. Rates are at/close to all time lows so anything extra you can clear now, will not end up on a higher rate when you come to remortgage. Most lenders limit the overpayments to 10% of the outstanding balance each year, although some, such as Metro, usually allow 20%. Most tracker rate mortgages will allow unlimited overpayments without a penalty. If you overpay more than the allowed amount, you will normally incur an Early Repayment Charge on the excess. These tend to be between 1% and 5%. The main advantage of overpaying is that you can clear your mortgage sooner. The main disadvantages are that you will have less money in your savings/investments. In addition, with mortgage rates so low, the chances are you could earn more on the money by investing it, than you will save from mortgage overpayments."
The best time to overpay on a mortgage is whenever you've got surplus cash that you don't know what to do with. That said, depending on the rate that you are paying and how long you have left it may be better to save into a stocks and shares ISA as you could get a better return on investments than the reduction in interest charges on a mortgage by making overpayments. As a rule of thumb most mortgage lenders allow overpayments of up to 10% of the outstanding balance, usually calculated as the balance at the start of the year or anniversary of your mortgage. However, you should always check the conditions contained within your offer documents for the specifics. There can be large monetary penalties for exceeding overpayment allowances called early repayment charges which again will be spelled out in your offer documents and these can run to thousands of pounds and are normally a percentage of the outstanding loan, which would wipe out any marginal saving you had made so be careful. The upsides for overpaying are that you reduce the total amount of interest you pay and you'll likely reduce the length of your mortgage overall meaning you can be debt free sooner rather than later. The downsides however are that once you have put that money into the mortgage it can be difficult to get it out should you need it for short term emergencies which is why I'd always recommend keeping at least 6 months net income to one side as a sluch fund, and given how low rates are, you may be better off saving money direct from your wages into a pension as this gives a tax benefit as well as preparing for you retirement which seldom few as take seriously as they sholud.
"Overpaying on your mortgage can provide huge savings as most lenders calculate the interest payable daily. The higher your interest rate, the higher the saving you will make but there are often restrictions on this. Most lenders allow you to overpay by up to 10% of the remaining mortgage balance per annum with no penalties but if you are planning on doing it then you should check the restrictions with your lender first."
Overpaying your mortgage is one of the easiest and simplest ways of saving a small fortune over the lifetime of the loan. Even a small increase adds up to a big saving over the years, for example if you can round your payment up from £754.33 to even just £755 it makes a difference - and you wont even notice the 0.67 per month. However, not all lenders allow penalty free over payments - a lot of the more specialist lenders don't offer the facility. The more mainstream lenders often allow 10% of the balance to be repaid each year without any penalty being incurred, some may even allow more than this, a few specific mortgage deals will even allow unlimited over payments without charge. You need to refer to your mortgage offer to see what the exact details are for your own mortgage. There are very few downsides to making over payments, other than one I can think of: once you have made the payment it is the lenders money, not yours, unless your mortgage offer specifically states otherwise. So be careful and make sure that you do not need the cash for anything else before you make the over payment, as the only way to get it back out of the mortgage is to go through a further advance process with your lender and they may say "no".
Is now a sensible time for people to overpay their mortgage? There is never a sensible time to overpay on a mortgage if you have the funds to do so do it if can’t afford to not miss that money hold off by popping the money into a savings account just in case you need it for other emergencies. What restrictions, if any, do lenders put in place in relation to overpayments? The majority of lenders allow overpayments if you are in a fixed rate it’s usually 10% of the capital owed without any penalties. Can borrowers be penalised for overpaying too much? The only time this can happen is if you exceed the amount you are allowed to overpay and very few ever have to worry about this. What are the general pros and cons of overpaying? The major pro is you will owe less on your mortgage when you come to re-mortgage the con is once you have made the overpayment you don’t get that money back should an emergency occur such as the boiler breaking down.
Now is a generally a good time to be making overpayments, assuming you have one of the very low interest rates that are available and have been available over the last couple of years. If you have a rate under 2% then it's a good time to take advantage of your overpayment facility. Most lenders will allow you to overpay by 10% per year. This vares from lender to lender and the 10% allowance can sometimes be of the original balance, which is more generous, but more often it's of the current balance on a rolling 12 month period. If you over pay by more than the % allowed by your lender within a given period you will pay a penalty on anything over and above the allowance. Historically Tracker rated and Early Repayment Charge (ERC) free products have been very good for clients that wish to overpay in signifcant amounts because there is no limit on the amount they can over-pay and therefore no penalty for doing so. However, with interest rate rises expected now would not be a great time to be taking a Tracker rate with the likelihood that ratesd will rise in the near future and you may end up paying a higher interest rate than if you had opted for a fixed-rate product. If the ability to over-pay is a particularly strong preference for an applicant this should be mentioned to a Mortgage Adviser at the outset as this is soemthing that can be taken into consideration when recommending a particular lender or product and it also opens up a potential coversation about other products that may be suitrabler, such as Offset Mortgages which is a a way to use your savings to reduce the cost of your mortgage. Instead of earning interest on your savings, you will reduce the amount of interest charged on your mortgage. In summary, if you can afford to make regular over-payments it is always advisable to do so. Not only will they reduce your mortgage balance quicker and therefore shorten the life-span of your mortgage but it will also potentially allow you to access lower interest rates quicker than you would otherwise have been able to.
With savings rates as low as they are overpaying your mortgage even by a small amount reduces the interest payable and can also shorten the term and therefore save you £1000's. Be aware though lenders tend to limit the amount you can overpay typically by 10% per annum before applying an early repayment charge. Making sure you are always on the best mortgage rate and switching to a better deal when the opportunity arises is a good way of saving money. For example if you switched to a lower interest rate this would allow you to pay off your mortgage quicker if you continued paying the same monthly payment. However it is always important to have access to an emergency savings reserve in case of an unexpected event and borrowers should look to build this up first.