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6 Jan 2019

Half of UK homeowners make mortgage overpayments - should you join them?

Find out what to be aware of before overpaying your mortgage

Almost half (46%) of UK homeowners have made overpayments on their mortgage in the past year, according to Which? research.

The Which survey found that younger homeowners were most likely to have overpaid their mortgage, with seven in 10 (69% of) 18-24 year olds having made at least one overpayment.

Here, we take a look at how mortgage overpayments work and whether overpaying is the right option for you in 2019.

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Mortgage overpayments in the UK

When we surveyed over 3,500 homeowners with mortgagesin June 2018, 46% of respondents said they'd paid more of their mortgage off than they had to in the past year.

Young homeowners (those aged 18-24) were most likely to have made a mortgage overpayment, with a whopping 69% of respondents in this age range paying off more than the amount required by their lender.

Homeowners aged 25-34 were the second-most likely to overpay their mortgage, with 52% paying extra to their lender.

Geographically speaking, mortgage overpayments were most common among Londoners (60%), followed by the West Midlands (52%) and the South East (48%).

Homeowners in Scotland were the least likely to overpay on their mortgage, with just 38% saying they had done so.

The map below shows the percentage of homeowners who made a mortgage overpayment in each region.

What is a mortgage overpayment?

When calculating how much you can borrowfor a property, your mortgage lender takes a number of factors into consideration including your income, expenditure and their own affordability criteria.

Your monthly repayments will depend on the size of your loan, the interest rate and the term (the period of time you'll pay the loan back over).

Mortgage overpayments are, as the name suggests, when you pay more towards your mortgage than the amount originally set by your lender.

The aim of overpaying is to clear your mortgage debt more quickly by reducing the size of your loan and therefore cutting the amount of interest you'll have to pay back. You can usually only pay back a certain amount per year (often 10%) before incurring penalties.

A mortgage overpayment could be made in the followingways:

  • A one-off sum,e.g. makinga single overpayment of £3,000
  • Regular overpayments, e.g. paying £800 a month instead of the £600 set by your lender
  • A combination of the two

Why make mortgage overpayments?

There are several benefits to overpaying your mortgage including:

1. Paying off your mortgage faster

The amount you overpay your mortgage by goes towards repaying the capital of your loan, meaning that it will take you less time to repay your debt.

2. Reducing the interest you pay

By reducing the size of your loan, you also cut the amount of interest you'll have to pay on your loan amount.

3. Increasing payment flexibility

Overpaying your mortgage puts you ahead of your payment schedule, which could give you the flexibility of underpaying further down the line. Not all lenders will allow this, though, so it's important to check the lender's overpayment policy before choosing a deal.

Are mortgage overpayments right for you?

Overpaying your mortgage can be an effective way of clearing your mortgage debt faster. Before overpaying, you'll need to check that your lender will allow you to pay extra without incurring a penalty, as well as whether there are any limits on how much you can overpay by (many lenders cap overpayments at 10% per year).

It's important to note that mortgage overpayments may not be suitable foreveryone and your ability to make them will depend on your financial circumstances.If you have any non-mortgage debts like overdrafts, personal loans or credit card debt, for example, it might better to pay them off first as they tend to have higher interest rates, makingthem more expensive.

David Blake, Which? mortgage expert, said: 'Mortgage overpayments are a good way to clear your mortgage faster. Not all mortgage products allow you to make overpayments so it's really important that you check the terms of your loan first.

'It's also vital that you do the sums before making an overpayment. With most providers, once you make an overpayment you can't get the money back and the lender will still expect you to make your full payments every month moving forward.

'So if you're likely to need access to emergency cash, it might be best to stick to your original repayment plan.'

Alternatives to mortgage overpayments

Overpaying isn't the only option if you want to clear your mortgage debt sooner than originally planned. You could also consider:

Shortening your mortgage term

It might be possible to ask your mortgage provider to shorten your mortgage term by a few years, reducing the amount of interest you pay in the long run. This is likely to increase your monthly repayments so it's important to make sure that you can afford the new amount.

Remortgaging to a cheaper deal

If the introductory deal period on your mortgage is coming to an end, and particularly if it's already ended, you might be able to switch to a cheaper product with a shorter term. Be sure to do the sums before switching, though, as remortgaging may trigger an early repayment fee on your current mortgage.

Switching to an offset mortgage

An offset mortgage works by linking one or more bank or savings accounts to your mortgage. All of the money you have saved up is then taken off your mortgage balance before interest is calculated. Offset mortgages allow you to overpay your mortgage and repay it early too.