How to make overpayments
If you, along with 46% of homeowners in the UK, think that paying off your mortgage fast is something that you would like to do, then you are at the right place! Whilst this seems simple, there are many things to think about if you are looking to do this optimally.
In this article, we take a look at 8 steps you should undertake, should you want to pay off your mortgage faster on your own. Alternatively, you may find it easier to register for early access with Sprive and we will let you know when the app is available to download.
1. Understand the amount you are allowed to overpay - the amount you can overpay will depend on the lender you are with and the mortgage product you are on. The majority of lenders will allow you to pay up to 10% of the outstanding balance. However, this can vary and thus, it is better to be 100% sure. If you overpay above the limits set by your lender, then they could charge you an early repayment charge. This charge will be on the amount you have overpaid. The banks typically set a 1% to 5% penalty to prevent you from repaying your mortgage too quickly. You can find out how much you can overpay by asking your lender, checking your mortgage offer document, or checking online.
2. Calculate how quickly you can afford to pay off your mortgage - you should have a sense of how much you save each month. If you do not, you can use a money-saving app, such as Yolt or look at your historical bank statements. Then, we suggest you start playing around with an online overpayment calculator to see how quickly you can pay off your mortgage within the limit of what your product allows and the amount you feel comfortable overpaying each month.
3. Determine your goal - now that you know approximately how much you save each month and have seen the benefit of overpaying, you can decide how quickly you want to pay off your mortgage. Another factor that might influence your decision is how close you are to the next lender Loan to Value (LTV) threshold.
You can calculate your LTV by going to a website, such as Zoopla and entering your postcode to determine your property value. You then take the outstanding balance on your mortgage, divide this by the property value and multiply by 100. If you can overpay and go below one of the lender's thresholds then you are more likely to get better mortgage deals and save even more money when you next remortgage.
4. Understand the impact - you might think this would be simple. However, unfortunately, many lenders in the UK make it more difficult than it should be. To maximise your savings in terms of pounds and time, you need to make sure mortgage overpayments are reducing the mortgage balance (i.e. the loan amount outstanding).
Many lenders require you to call them to let them know. Otherwise, their default is to keep the term the same and reduce your monthly payments. So make sure you know how your lender will treat your overpayments and make the call to your lender to change your preferences if required.
5. Calculate the amount to overpay - if you have a large amount of savings that you’re willing to put towards your mortgage, then the optimal thing to do is to pay a large lump sum as an overpayment which could be up to the maximum allowance that your lender permits.
If you prefer to make monthly overpayment, then you probably want to review how much you have saved each month, as you will likely pay off your mortgage faster if you put more towards your mortgage in the months where you have saved more.
6. When to overpay - it’s worth taking into consideration when your lender calculates interest on your mortgage. Your interest could be calculated daily, monthly, quarterly or annually. If your interest is calculated daily, then you can make payments at any time. However, if not then Sprive suggests you make the payment a day before the interest is calculated by your lender.
7. Setting up the payments - you can keep things simple and set up a direct debit with your bank. If you prefer to maximise your savings, then you can make regular one-off overpayments to your lender each month. You can find out how to do this by contacting your lender, checking their website, or by using the Sprive app.
8. Tracking overpayments - keep a spreadsheet to track your overpayments and savings or alternatively why not just get the Sprive app to do this for you!