As homeowners and investors across the UK look to benefit from low mortgage rates there are potentially huge savings for those in a position to overpay their monthly mortgage payments. We all know it is extremely beneficial to repay capital as soon as possible which will reduce the ongoing interest rate and repayment date. However, have you ever looked at the figures to see the real difference when you overpay your monthly mortgage payment?
Basic mortgage scenario
If we take a very basic mortgage scenario and look at the benefits of overpaying your mortgage repayments you will begin to see the enormous benefits.
Mortgage debt: £100,000
Mortgage term: 25 years
Type of mortgage: Repayment
Interest rate: 3.5%
In this particular situation you would normally pay £501 per month, part of which would go towards repaying capital and interest. Over the 25 year term the full repayment would be:-
£150,238 (including capital and interest)
The greatest interest charges are at the very start of your mortgage when the least capital has been repaid. As more and more capital is repaid, the percentage of your monthly payments going towards repayments will increase as the interest charge falls. However, how would you benefit by repaying an extra £100 a month towards your mortgage?
Overpayment of £100 a month
We will now take a look at the cost savings of overpaying your mortgage to the tune of £100 a month from day one.
Saving on interest charges: £13,108
Reduction on mortgage term: Five years and 11 months
Total repayment: £137,130 (capital and interest)
It is not difficult to see the significant savings for those able to repay an extra £100 a month towards their mortgage. In many cases this is possible because as we grow older you would hope to increase your income, have more assets available and hopefully fewer costs especially if you have a grown-up family.
Trimming the interest rate
We have looked at the benefits of overpaying your mortgage but what are the financial benefits of trimming the interest rate on your mortgage. It may be possible to reduce this rate by paying a greater deposit or utilising other assets you have as security. If we use a similar situation to the one above, except reducing the interest rate to 3%, the situation is as follows:-
Mortgage debt: £100,000
Mortgage term: 25 years
Type of mortgage: Repayment
Interest rate: 3.0%
In this scenario your mortgage payments would fall to £474 per month and over the 25 year period your total payments will be £142,239. This equates to a saving of £7999 just by negotiating a lower headline interest rate. Now, if we also look at this situation (compared to the original figures) with an additional £100 overpayment per month, and reduced interest rate, the figures are even better:-
Saving on interest charges: £18,803
Reduction on mortgage term: Five years and 11 months
Total repayment: £131,435 (capital and interest)
We hope that this shows the benefits of regular overpayments as well as the long-term interest savings where you’re able to offer security/negotiate a reduced headline interest rate.