With interest rates rising, overpaying on a mortgage can be tempting. It can mean you save money in interest in the long term. But, it can also reduce the short-term cash you have available. So, which is the best option? Here are the pros and cons:
The average interest rate on a mortgage is now 6.94%. The main benefit of overpaying on your mortgage is that you’ll be paying off your balance faster, and the money you save in interest usually beats the returns you would get from putting it in a savings account.
As you don’t pay interest on the amount you overpay, doing this can also reduce your monthly repayments, and this is money that can be spent on other things.
However, a disadvantage to overpaying on your mortgage is that sometimes, early repayment charges can be added for paying off your loan too early. This depends on the lender, but it could be up to 5%, so make sure you check your mortgage agreement first.
Paying into savings
With higher inflation, living costs have increased and one of the main advantages of keeping your money in a savings account is that it’s easily accessible if you need it.
It’s worthwhile to have a cash emergency fund. Otherwise, if there’s an emergency like a job loss, house repair, sickness, or something else, you may not be able to access any funds if all your spare cash has been used to pay off your mortgage.
Additionally, if your circumstances change, your mortgage repayments will still be due and your lender won’t be able to pay off any arrears using the overpaid amount.
As interest rates are higher at the moment, this also means you can get better deals on savings than normal, which can be beneficial in the long term.
Check your finances carefully
You can save a lot of money by making mortgage overpayments. However, it’s a decision that you should think through, as it’s important not to leave yourself short of cash. It can be hard to get the money back, as you may not be able to refinance later.