No matter how healthy your finances are, overpaying on your mortgage has its pros and cons. You may be considering paying more towards your mortgage in the form of lump sum payments, or bi-weekly payments, and this can help you to reduce your debt as well as the interest you pay. Every homeowner’s dream is to pay off their mortgage before their final payment, however there could be drawbacks to this plan.
There are a number of common pitfalls to watch out for when considering paying off your mortgage, most notably early repayment fees. Thankfully however, very few people have large amounts of cash tucked away to pay off their mortgage, so any contribution is going to have to be a lot smaller. In order to decide whether or not to overpay on your mortgage, let’s take a look at some of the most common ways to enhance the impact of any extra payments you put toward your mortgage.
Many people decide to overpay on their mortgage because it will save them money in the long run. The more you pay off, the less you’ll have to pay later down the line, and you can also benefit from the interest savings you will make. If you have lots of equity in your home, then you’ll most likely be able to benefit from the current market deals. The more you overpay, the more equity you build up in your home, meaning when it comes to looking for a better mortgage deal, you’ll be in a great position.
Paying off your mortgage will also be tax efficient, as you’ll benefit from interest savings much more than if you’re spare cash was in a savings ISA. As the interest you earn on your savings in taxable, you’ll certainly save more money by paying as much of your mortgage off as you can through overpayments. On the other hand, if you’re going to make more money through ISA interest, compared to the savings you’ll make paying off your mortgage, then this would be the better option to take.
At the time, making overpayments on your mortgage could seem like a great idea, however it’s always best to get a second opinion from an independent financial advisor. Firstly, you will have to check with your bank to see if they’ll allow you to overpay. In essence, the more you pay, the more savings you’ll be making on interest, and the less money the bank makes from you. Check your contract to see if your lender will accept overpayments.
Additionally, you might want to consider using any spare money to pay off other debts, like credit cards and store cards, before you pay off your mortgage. If you’re paying a high rate of interest on these debts compared to your mortgage repayments, then it makes sense to pay these debts off as quickly as possible. Once this has been done, you can then focus on paying off your mortgage.