Before overpaying the mortgage, consider this…
Let me try to set the scene…
You might have more coming in each month than is going out.
You might have just been promoted, or perhaps you’ve got through the most expensive years of raising a family. Whatever the reason, you want to make sure your money’s working as hard as you do.
A lot of people decide that overpaying the mortgage is a good idea, but is this the best option?
The simple rule of thumb is if your mortgage rate is higher than the after-tax rate you can earn elsewhere, the answer is probably yes.
But as with any financial decision, it depends on your circumstances, and there are some things you need to be aware of before going down this route.
In this article, I’m going to give you everything you need to know and everything you need to do to help you decide whether paying off the mortgage is the best use of your money.
The benefits of overpaying the mortgage
I’m guessing your mortgage is your biggest debt. It hangs around your neck like a millstone. It’s the reason you get up every day and go to work.
So, overpaying the mortgage has a certain appeal. It brings forward the date that you become debt-free. And once the mortgage is repaid, it gives you more flexibility to live life on your terms, rather than working to pay back the bank.
The great thing about overpaying the mortgage is that you know what ‘return’ you’ll get by overpaying. It’s simply the mortgage rate. So, if your mortgage rate is 3.5%, that’s the return you’ll get by overpaying.
Let’s imagine you’ve got a £150k mortgage at 3.5%, with 15 years to run, and you’re paying £1,070 per month. If you overpay your mortgage by an extra £300 per month, you’ll save £12,137 in interest – and pay off the mortgage 4 years earlier.
To work out the interest you’ll save by overpaying the mortgage, you can use this calculator.
4 things you need to be aware of
Before you chuck all your spare cash at the mortgage, there are a few things you need to do first.
First up, if you’ve got other expensive debt, clear these first. Personal loans, credit cards, store cards. The interest rate on these is often 15 – 20%. They may only seem small, but they snowball quickly. Think of paying these off as a guaranteed return of 15 – 20% per year. You won’t find many of those!
Second, make sure your mortgage allows you to overpay. A lot of mortgage providers limit overpayments to 10%, so this is something you’ll need to check.
Third, make sure you’ve got other savings in place to cover any emergencies first. There’s no point paying down the mortgage just to turn to credit cards when the boiler breaks down!
Finally, consider the alternatives. Overpaying the mortgage is likely to give you a return of around 3% per year, but could you get better elsewhere? Perhaps saving into a pension might be a better idea, given that the Government is willing to put in up to £40 for every £60 you put in.
Most financial advisors will tell you that investing your money is the best idea. We’re a bit more open-minded.
If you prefer to play it safe, paying down the mortgage is a great idea. But make sure you’ve cleared your other debts and have a decent emergency fund in place first.
If you want to explore this in more detail, or perhaps discuss some of the alternatives, just drop me a line.
All the best,
James Mackay, Independent Financial Adviser in Bristol
Financial Advisor Bristol and Pension Advisor Clifton
About us: Frazer James Financial Advisers is a financial advisor, based in Clifton, Bristol. As an independent financial adviser, we’re able to provide independent and unbiased financial advice. We provide independent financial advice, pension advice, investment advice, inheritance tax planning and insurance advice.
If you would like to speak to a Financial Advisor, we offer an Initial Financial Consultation without cost or commitment. Meetings are held either at our offices, by video or by telephone. Our telephone number is 0117 990 2602.
Frazer James Financial Advisers is located at Square Works, 17 – 18 Berkeley Square, Bristol, BS8 1HB.
This article provides information about investing, but not personal advice. If you’re not sure which investments are right for you, please request advice.
Remember that investments can go up and down in value, you may get back less than you put in.