Mortgage loans may stretch over 25-40 years, but that does not mean you need to assume you are stuck with the mortgage debt for that amount of time. The simple act of overpaying your mortgage when you are able to afford to will reduce the number of years you are saddled with a mortgage debt. The best thing is that you will save thousands of dollars or pounds over the term of the mortgage, by paying less interest to the mortgage provider. This has got to be good news.
Making overpayments towards the principal also builds up your equity in the property more quickly. This can be very advantageous if you want to refinance your mortgage, as the lowest interest rates are available to those with a good loan to value ratio. For those who made an initial low down payment then overpaying may release them from the necessity of mortgage protection insurance or MIG, and provide a cushion against negative equity.
You can work out just what savings would be applicable to your own mortgage by using an online mortgage overpayment calculator. This will show exactly how much you can benefit both in money saved and years. Payments do not need to be high as even small monthly additions add up over time and can substantially reduce your mortgage.
Anyone who is subject to early repayment penalties should wait until the penalty phase expires before overpaying. Also some mortgage lenders set restrictions on how much the borrower is allowed to overpay as they want to keep hold of your business. It may suit some to make an annual overpayment if there is a windfall such as a bonus or tax return.
The other thing to be careful of is to check how your mortgage lender applies the interest to your mortgage. It could be daily, monthly or yearly. If the latter you will only benefit by overpayments if they are made just prior to the annual addition of interest and not on a monthly basis.
Of course it makes no sense to overpay your mortgage if you have other debt which needs paying down at higher interest rates. The most prudent thing to do is clear down all debt and then ensure that an emergency fund is established, prior to overpaying the mortgage. It is important to realize that once any money is overpaid into the mortgage you cannot have it back and it is inaccessible to you.
Overpaying your mortgage is really a very simple way to save yourself tens of thousands of dollars or pounds in unnecessary interest payments. If you are on a variable rate mortgage and the rate falls then simply continue paying at the current rate and you won’t even feel you are paying more, but will still reap the benefits. It really is a simple yet effective strategy which will work to your long term advantage.