Fiducia Wealth Management
Share this article

Paying off your mortgage can enable you to reduce work commitments, gain greater flexibility with retirement goals and remove what can be an emotional burden. This article looks at ways of accelerating mortgage repayment and the benefits of doing so.  

 

Benefits of Paying Your Mortgage Off Early 

Getting mortgage-free faster has several appealing advantages: 

 

  • Pay less interest over the loan term – 10 years of over payments on a £100,000 mortgage could save over £30,000 in interest. 
  • Build equity in your home quicker 
  • Own your home outright sooner and reduce monthly bills 
  • Flexibility to sell your home or downsize more easily without an outstanding mortgage 
  • Peace of mind and a sense of financial freedom 
  • Open up opportunities to pursue other financial goals. 

 

Ways to Overpay Your Mortgage 

Most lenders offer various options to overpay and accelerate repayment: 

Adhoc Lump Sums – Making one-off extra payments whenever funds available. Mortgage providers typically permit overpaying up to 10% of outstanding balance annually without a penalty. 

Regular Overpayments – Set up an additional monthly direct debit at a higher amount than required payment. This builds over payment into your ongoing budget. 

Annually, in line with remuneration – Make yearly lump sum with bonus, tax refund or other windfall amounts. Acts as an annual mortgage repayment ‘top up’. 

Utilise a combination based on your financial situation. Even modest over payments each month add up over time. 

 

How Much Can I Overpay on My Mortgage? 

Lenders allow overpaying your mortgage by the following amounts, typically: 

  • Up to 10% of your outstanding loan balance each year. 
  • £10,000 in a single lump sum within a 12-month period. 
  • No limit on regular monthly overpayments. 

Beyond these thresholds, you may incur early repayment charges, so do confirm the actual terms and conditions with your lender. Refinancing with a more flexible lender can remove restrictions. 

 

How Overpayments Impact Mortgage Term 

The effect of overpayment depends on: 

 

  • Your current mortgage term and interest rate 
  • The remaining outstanding principal 
  • How much extra you overpay each month/year. 

 

As an example, let us assume: 

 

  • 25-year mortgage term remaining 
  • £150,000 balance outstanding 
  • 3% interest rate 
  • £200 monthly overpayment 

 

The impact would be: 

 

  • Original term: 25 years 
  • New term with overpayment: 20 years 
  • Total interest savings: £18,000 

 

Overpaying sliced five years off the term and created substantial life-cycle interest savings in this example. Consult your lender to model the exact impact of your planned overpayments. 

 

Using Windfalls Wisely to Overpay 

Lump sums like bonuses, tax refunds and inheritance can fund extra mortgage payments: 

 

  • A £5,000 one-off overpayment could save over £2,500 in interest on a £200,000 mortgage. 
  • A £10,000 overpayment could knock 3-4 years off a 20-year term. 
  • Avoid temptation to spend windfalls and direct them into your mortgage instead. 
  • Be mindful of early repayment charges – use for overpaying upon remortgaging. 

 

Mortgage terms decrease significantly when seizing opportunities to make one-off sizeable overpayments with surplus funds. 

 

 Should I Overpay or Invest My Money? 

 Overpaying versus investing extra cash is a common dilemma. It depends on factors like: 

 

  • Your mortgage interest rate – overpay if over 5% 
  • Confidence you can earn higher returns investing than mortgage rate 
  • Your comfort having investments while owing mortgage debt 
  • Time horizon – overpay if close to retirement 
  • Liquidity needs – investments provide easier access 

 

Consider your risk tolerance, time-frame and total income & assets. A balanced approach for many is investing while making regular mortgage overpayments. 

Mortgage advisers are their own distinct profession, with their own authorisation for financial advice. Given we are not mortgage advisers, this article is not to be taken as advice and should not be acted upon as such. Instead, we can put you in touch with a suitably experienced and authorised mortgage professional.  

 

Potential Risks of Overpaying 

While advantageous in most cases, it is vital to understand the risks: 

 

  • Reduced emergency cash reserves. 
  • Missed potential investment gains if markets outperform mortgage interest 
  • Early repayment charges can diminish effectiveness if overpay limits breached 
  • Could be difficult to reverse course once the principal paid down if cash needed later but do check with your lender in advance.  

 

Conduct a full analysis of your financial profile before committing to an aggressive over payment plan. 

 

Accelerating Mortgage Freedom 

Overpaying your home loan within lender limits provides homeowners a proven, low-risk way to become mortgage-free that much faster. This frees up significant monthly cash flow while saving substantially on lifetime interest costs. Whether making modest monthly overpayments or lump sum top-ups with windfalls, putting your money to work against your mortgage provides financial benefits that will leave you mortgage-free and ready to pursue other goals years earlier than otherwise planned. 

Speak to our multi award winning team of Chartered Financial Advisers to identify the best choices to make where your finances are concerned.