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Why you should over pay on your mortgage

Over paying on your mortgage could literally save you thousands over a life time. Many mortgage providers (Santander, HSBC etc) allow you to pay off more of your mortgage each month/year than what was initially agreed. What is the advantage of this? Well, the less amount of time you keep their money for (the debt you owe on your house) the less interest they can charge you for it. Let’s take a quick look at an example and see how much we could save over a standard term of 25 years.

Take a £100,000 mortgage at 5.75% (fixed) for 25 years. The monthly repayments would be around £630. Over the lifetime of the mortgage (25 years) you would pay back a total of £188,732 (the £100,000 initial loan + £88,732 of interest). Now let’s have a look at what would happen if you were to pay an extra £50 every month and pay £679 back.

Your total repayment (the initial loan plus interest) is now £173,713. Your mortgage would be fully paid off almost 4 years earlier (21 versus 25 years), and you would of saved a total of just over £15,000 in interest. Not bad for an extra £50 a month, that’s just a few less nights down the boozer or less takeaways. Think what you could do with £15,000 pounds.

Things to check first.

Does your current mortgage lender allow over payments? Most big banks (Santander, NatWest etc) do allow over payments but there are normally restrictions on how much you can over pay and how frequently. For example it’s typical that you will only be allowed to over pay by 10% of the mortgage amount every year. If you look at it through their eyes why would they want to help you to stop paying that lovely interest to them? Remember a bank, Santander, HSBC, any of them are businesses and at the end of the day they have a responsibility to their shareholders to make as much money out of you as possible. So always check your mortgage terms and conditions very carefully first.