It’s been an eventful year in the mortgage arena – interest rates have soared after years of record lows, and the cost of your new fixed deal could be much more than you paid for the last one. With all the uncertainty, many mortgage holders are looking what they can do to reduce monthly payments – and one of the options is to overpay, to reduce the size of the overall loan.
But is this solution right for you? It all depends on your individual circumstances and financial goals. Here are some factors that you should consider when deciding whether to make overpayments on your mortgage.
Interest Rate on your Mortgage Loan
Broadly speaking, the size of your loan will be reduced most by overpayments if you have a higher interest rate on it. If you are still paying off a fixed rate mortgage that was set before the interest rates began to rocket, the overall size of your loan will be much smaller than one that’s subject to the new, higher charges – so it’s less likely to be a good use of your money.
However, if you have a mortgage that’s being charged at a more recent, higher rate (3% plus), overpayments could reduce the loan and therefore the amount of interest you’re charged – which could save you a significant amount in the long run.
The Term of the Loan
Making overpayments can help you to pay off the mortgage sooner than planned. The overpayment reduces what you owe, but keeps your monthly payments the same – so the amount will be paid off in a shorter period of time. This could help you to become debt-free sooner, which will relieve some of your monthly outgoings in the future and could leave you free to sell up, move elsewhere, or downsize and keep the difference.
The Size of the Monthly Repayments
Conversely, reducing what you owe could mean that your monthly repayments go down, while the term of the loan the same. Again, the size of the loan is reduced but the time period for repayment stays the same, so the amount to pay each month will be less. This could mean some relief for your monthly outgoings now.
Other Debts
Paying off loans you have with the highest rate of interest should always be the top priority, because they will cost you more over time. Consider credit card balances, car finance and any other loans you may have. Paying off those debts earlier could save you much more in the long run.
Saving to Protect the Future
Financial security in the future is so important, and reducing your mortgage payments is only one of the opportunities you have to achieve it. Even more important than reducing your mortgage is establishing a solid pension fund, and creating an emergency savings fund for unexpected events. With the right interest rate, this could be a much better return for you and make you better off in the long run than paying off a mortgage that carries a lower rate.
Having the right protections in place to cover loss of income could also prove far more valuable to you, should the worst happen.
What’s Next
Ultimately, it’s vital to assess your finances as a complete picture before you decide whether mortgage overpayments are the right way to invest your cash. Remember too that many mortgages have overpayment penalties. In some cases, paying the penalty may still save you money in comparison with the full term and loan amount, but you must factor those penalties into any calculations you make.
A financial advisor should always be your first port of call when looking at your finances in full and over the long term. Give us a call today to arrange a review of your own situation and plans for the future, so you can decide whether overpayments are right for you now, or in the future.
When it comes to finding the right mortgage, it’s about your personal finances first.
This is probably the first tip you expected and rightly so. It’s important to know what you can afford and how you will afford it. Honestly, it is quite rare for someone to come and see us without having some idea of their financial situation however, it’s not uncommon for people to misjudge it. So, always start here and have a ballpark idea of where you stand. Don’t worry, if you are not 100%, we will go through it with to anyway. As a preparation exercise we suggest you go through your income and outgoings and look at what your commitments are. Remember these easily forgotten things like monthly direct debits for small amounts. As an extra tip on this subject, it may be worth looking at what you could do to reduce your costs. A few pounds here and there can make a big difference when it comes to affordability.
Check your credit score
There are a lot of free services where you can see your credit score and get an idea of where you are in relation to the rest of the UK. The rule of thumb is that the better your score, the better your deal will be. However, it isn’t as simple as a credit score because your financial resilience as a borrower will also be a factor. If you have a low score, don’t panic, and don’t think ‘that’s the end’ when it comes to a mortgage. It may not be. Come see us and we can look at options. We find mortgages for people in all sorts of circumstances every day.
Deal with as much debt as possible
Your mortgage application will be based on affordability as well as your credit score and some other factors (see below) so, the more disposable income you have the better. If you can get rid of or significantly reduce any outstanding amounts on credit cards, loans, and other costs, the lender will get a clearer picture of your finances. Don’t let this stop you from coming to see us for an initial consultation though. We are here to help you go through things.
Do the little things that really help.
There are a number of things that you can do that will really make a difference. The lender is looking for someone who stacks up financially and is a reliable borrower. Check you are in the electoral role, again, this could show up as a question about your application. Make sure all your rent, utilities and other commitments are up to date and that you have records of all these.
Paperwork and proof that help us get it right for you
Start to gather your paperwork together as soon as you can. For safety you will want to be able to show the following:
Your salary for at least three months
Your most recent P60
Utility bills for and proof of rental (if you currently rent) as proof of address and they also demonstrate your rental outgoings for consideration in the affordability aspect of some mortgages.
Identification documents (passport for example)
Bank Statements for the previous three months and any savings you have
If you are self-employed, we will need to see tax returns and your accounts, usually three years as a minimum.
Again, this is not a complete be all and end all list. If you don’t have some of these or you don’t quite meet the above, it doesn’t mean the end of your application. We deal with that problem all the time, so let’s work it through.
Common mistakes when applying for a mortgage
These are a few of the more common mistakes we see people make.
- Try to be as accurate as possible when you look at your finances. A mistake in budgeting can be a pleasant or rather shocking surprise when it comes to how much you can afford.
- Forgetting income is also surprisingly common. People sometimes forget to include things like part time additional jobs, overtime elements in their last three months salary, commissions, bonuses, profit related pay, investments, and pensions.
- Make sure your history of addresses is correct and complete.
- Don’t forget to check the basic information for your application. We need your full name (and any previous ones) and correct date of birth and address etc because any mismatching could cause delays.
- Don’t make any significant financial changes before the application. No new loans or credit cards for example.
- Finally, this is an important one, if your deposit was a gift or personal loan, we need to know about it. There is additional paperwork and diligence to be done if this is the case.
Know your timescales
There is a processing time for mortgages and the whole house buying process. For the sake of your own peace of mind it’s well worth understanding timescales to avoid the frustration that comes with not knowing. While this may not strictly be part of the mortgage application, you will feel much better if you know what is happening, and when.
As always, the best way to prepare is to talk to an expert and we are here to help.