SAVVY homeowners could save themselves thousands of pounds and pay off their mortgages years earlier by using their savings to pay off their debt.
Many people have managed to save money during the pandemic by closing cafes and restaurants, working from home and not taking holidays abroad.
The latest research by YouGov showed that a third of Britons have stashed more cash than usual during lockdowns, amounting to an average of about £4,500 each, or about £375 a month.
While some people have bolstered their savings accounts during the pandemic, others have lost thousands.
Of those who said they lost money during the pandemic, the average amount was about £3,000 – or £250 a month.
If you were one of the lucky Brits to save money during the pandemic, the smart use of your savings could be to pump some of that extra cash to pay off your mortgage.
It may be possible to pay off your loan earlier and save on future interest payments, saving you both time and money.
When you take out a mortgage, you agree on a minimum amount that you must pay back to your lender each month.
Overpaying simply means paying more, either regularly per month or as a lump sum.
How do you find the best mortgage deals?
WE explain how you can ensure that you get the best deal for your mortgage or refinancing:
Websites like MoneySuperMarket and Moneyfacts have mortgage sections so you can compare costs. All banks and mortgage banks will also have their offers available on their site.
If you’re confused by all the deals on the market, it might be worth talking to a mortgage broker who will help you find the best mortgage for you.
A broker typically costs between $300 and $400, but can help you save thousands over the course of your mortgage.
You also need to decide whether you want a fixed deal where the interest you are charged is the same for the duration of the deal or a variable mortgage where the amount you pay can change depending on the Bank of England base rate.
Remember, you must also meet the lender’s strict eligibility criteria, including affordability checks and reviewing your credit file.
You may also need to provide documents such as utility bills, benefits receipts, your pay stubs for the last three months, passports and bank statements.
If you overpaid just £50 a month, you could save £5,233 in interest and pay off your mortgage two years and three months earlier, according to the lender Habit.
This is based on a 25-year mortgage term of £150,000, with a current interest rate of 2.5%.
If you pay an extra $100 per month, you can pay off your mortgage four years and three months earlier, saving you approximately $9,291.
A recurring overpayment of £150 a month would net you £13,026 in saved interest, and you would also be mortgage-free five years and 10 months earlier.
If you overpaid £200 a month, it would help you pay off your mortgage seven years and three months earlier – and save you £16,009.
One-time overpayments are less lucrative, but can still make a difference.
If you overpay by $150 just once, you’ll save $130 in extra interest, but don’t shorten the mortgage repayment term.
To shorten the term of your mortgage by one month, you must make a one-time payment of $500 or more, saving $431 in interest.
Rosie Fish, mortgage expert at Habito, said: “If you can afford to overpay your mortgage, you should because it can help you get mortgage-free faster and save the interest you would have paid if you had been at fault for longer.”
But it’s important to do your research to make sure overpaying your mortgage is the right decision for you.
There are a number of points to consider before increasing your mortgage payments.
What should you pay attention to?
One reason it might not make sense to overpay is if you have other, more expensive debts that need to be settled first, such as an overdraft.
You should also remember to tell your lender that the reason you are overpaying is to shorten the term of your mortgage.
Otherwise, your bank can keep your term the same and use your one-time lump sum to lower your monthly payments.
You should also watch out for early repayment charges (ERCs), a penalty charged if you exceed the maximum repayment amount.
Most lenders allow you to overpay up to 10% of your remaining mortgage amount each year.
Check the fine print of your mortgage agreement to see what flexibility in paying too much money your deal offers you.
If you pay too much than is allowed, you will incur penalties that are usually between 1% and 5% of the outstanding mortgage.
For example, a 3% fee on a £150,000 mortgage would force you to pay £4,500, so it’s best to stick to the terms of your agreement.
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