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Is it worth overpaying your mortgage

Is it worth overpaying your mortgage
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Most of the time it can be a struggle to simply meet the basic mortgage payment each month. But every so often you may have a little extra cash, you may find yourself wondering if it’s worth using it to pay off a bit more of the debt on your home. Interest on savings accounts is at an all time low, leaving your money in the bank isn’t a particularly attractive option. But is reducing your mortgage really worth it in the end?

Before you Begin

Before you make the leap and throw every spare penny at the mortgage, stop and check out a few important facts first:

  • Your savings rates – are they as low as they can be? Most of us rarely check out the competition once the money is safely stowed in our accounts, take a little time to shop around and make sure you’re not making comparisons based on bad data
  • Check your penalty clauses – many mortgage deals, especially competitive fixed, discounted or tracker offers, include penalties for early repayment of all or part of your loan. Check the small print on your mortgage deal to make sure you don’t get stung
  • Which loans are costing you the most? – if you have various forms of debt, including credit cards and loans, it is worth working out which are charging you the most for the privilege. Good money sense means paying off the most expensive loans first, this will not necessarily be your mortgage
  • Do you have a slush fund? – while it may be tempting to use up any spare cash before you squander it on luxuries, it’s always wise to keep some available as a slush fund that you can draw on in emergencies. Reducing mortgage payments may be an attractive idea, but be sure not to leave yourself short
  • Your existing mortgage deal – if your current mortgage was established a while ago you may be able to save money simply be changing your deal to better one. Shop around

Know your Numbers

Is it worth overpaying your mortgageIt’s easy to get confused between savings and interest, and exactly what costs what. In fact, the calculations are quite simple. Take a look at the following two examples:

1. You have £1000 in savings – should you use it to pay off a £1000 credit card debt?

  • If your savings earn you 2% interest pa that’s £20 earned each year
  • If your credit card debt costs you 20% interest pa that’s a £200 cost each year

Using your £1000 savings to pay off the card will cost you £20 in savings interest, but save you £200 in credit card interest – that’s a net SAVING to you of £180 per year. You are better off paying off the debt, provided you don’t want to maintain access to your funds

2. You have £10000 savings – should you use it to pay off a £10000 mortgage debt?

  • If your savings earn you 2% interest pa that’s £200 earned each year
  • If your mortgage debt costs you 5% interest pa that’s a £500 cost each year

Using your savings to pay off the mortgage will cost you £200 in savings interest, but save you £500 in credit card interest – that’s a net SAVING to you of £300 per year. You are better off paying off the debt, again provided you don’t want to maintain access to your funds

A Word on Timing

If you do decide that paying off some of your mortgage is the right decision for you then be sure to make your extra payments at the right time. Mortgage companies typically calculate the interest payable on their loans daily, monthly, quarterly or annually. Check your terms to find out when yours falls.

Frequent calculations offer greater flexibility to the borrower. However, if your lender is calculating your interest annually, you need to ensure any extra payments you make happen before that date. If you don’t, you may find that your overpayment has no impact at all on the interest calculation for the current year. In this circumstance, you use your cash for no immediate return and lose out on your savings interest too. Be smart, and don’t sell your money short.

 

 

 

 

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About Cally Worden

About Cally Worden

Seasoned freelance writer Cally Worden lives with her family and dog in a quiet corner of rural France. A love of the outdoors, and a fascination with her children's ability to view life with fresh eyes provide the inspiration for much of her work. Cally writes regularly for various websites and UK print publications on subjects as diverse as parenting, travel, lifestyle, and business, and anything that makes her smile.

Website: Cally Worden

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