Recent reports suggest that since interest rates have plummeted over the last few months, more and more people are wisely choosing to make overpayments on their mortgages.
Why is this a good thing? Well, for starters by overpaying each month, you can significantly reduce the term your mortgage lasts for. Shorten the mortgage term, and you’ll end up paying less interest of the lifetime of your mortgage.
Not convinced? Check out our mortgage overpayment calculator which will show you the savings that can be made both in terms of years off your mortgage and total interest payable.
It’s also an indication that some people are more keen on increasing their share in their homes rather than spending elsewhere; as interest rates have come down, so have payments, but rather than spending elsewhere, many are probably continuing to pay the same amount each month, but, in effect, getting more for their money. It’s a good trick to try every time your mortgage rate decreases – try and maintain the same payment, if your lender allows such overpayments without any penalties or restrictions.
It no doubt gives a nice feeling each month knowing that you officially own more and more of your house, and your lender owns gradually less.
Of course, overpaying your mortgage is not for everyone – if you’ve got higher interest debts, such as credit cards, with balances outstanding, it’s worth considering whether you should put the extra money into those first. It might be difficult to calculate financially, so you may have to rely on your gut instinct; would you rather pay off that nasty little credit card balance which will be expensive for the relative short-term, or do you want to start reducing your mortgage from, for example, 20 years to 18 years, which is obviously a long-term benefit.
You may also want to consider using the extra money for building up an emergency fund, or even taking out some unemployment cover, should you wish to cover that.
photo credit: woodleywonderworks
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