Many homeowners are paying less each month on their mortgage than ever before thanks to low interest rates. And taking advantage of the low rates by overpaying your mortgage can mean you can also pay back a lot less overall – but should you do it?
Even before the recent cut, interest rates have been low for years, and lower rates can mean monthly repayments are smaller too, leaving a little extra in your pocket each month.
Yet with savings rates also incredibly low, there may be better ways of using that cash than simply leaving it in your bank.
Overpaying your mortgage is one way of getting more from the extra money - yet comparison site Comparethemarket.com found only two in five homeowners have done it.
The research revealed the biggest barrier was homeowners didn't believe they could afford extra payments – despite spending an average of £167 every month on luxuries.
The benefits of overpaying your mortgage
Overpaying on your mortgage will reduce the total amount you'll pay in interest and could take years off the length of the mortgage.
Adding 10% to the average monthly mortgage would be just £59 according to comparethemarket, while it would save £1,870 in interest and reduce the mortgage term by one year and four months.
Another benefit is you'll also have a smaller mortgage when interest rates – and your monthly repayments – go up.
Is there a better option?
Before you start throwing cash at your mortgage – stop! It might not be the best option. Here are three alternatives to consider first:
Pay off more expensive debts
If you've got debts elsewhere, say on a credit card or unsecured loan, the interest rate you're being charged is likely to be significantly higher than the one on your mortgage.
It's better to clear those debts first – and avoid building them up again – before you overpay your mortgage.
Put it in a pension
If you don't have a pension, consider starting one and putting spare cash in there. The earlier you start, the more money you'll have available when you retire. If you do have one, see if it's worth paying in more.
Build a savings buffer
If something were to go wrong – you could lose your job or be ill to work – do you have the funds available to keep you going for a while? The same goes for smaller unexpected costs such as fixing the roof, or replacing a washing machine. Can you do this without emergency loans or credit cards?
If the answer to either is no, you need to consider if overpaying is the right thing. Once you've put your money in the mortgage it's not usually easy to access it again. This means it's worth building up a savings buffer – even if the rates you get aren't great.
How to overpay your mortgage
If you're ok to overpay, and the money isn't better off elsewhere, take a look at your budgets to work out much you can afford to add each month. Our budget planner should give you a decent idea of where you have spare money.
Before making an overpayment, you need to check if your mortgage will let you overpay. Some have annual limits, while others have penalties for doing it – if you are allowed at all.
You also need to time it right. Find out if you are charged interest daily or annually. If daily, you can do it any time. If annually you need to time it so the overpayment counts for the whole year.
This article is provided by the Money Advice Service.