My-Mortgage.org

Homeowners are being warned by their banks that mortgage costs may be rising due to the credit crisis experienced by Northern Rock recently. One solution that financial experts have been suggesting is overpaying your mortgage, thus owning your home outright and mortgage free earlier than originally planned.

This can work in two ways. Firstly, asking your lender to reduce the term of your loan. This will increase your monthly payments but can drastically reduce the amount of interest you pay over the whole term.

For example, a £100,000 mortgage with a 6% interest rate could have £18, 670 knocked off the total repayable amount by reducing the term by just 5 years. But the payment each month could go up by over £250, so it’s not the solution for everyone.

The other option is to increase your monthly payment to a level you feel affordable, or pay off a lump sum. Check with your lender because some have a minimum amount required for a lump sum payment, and if your payment is less than this, it may not be credited to your mortgage account until the end of the financial year. Your mortgage lender may well discourage you from overpaying, as they inevitably lose out on interest or the conditions of your mortgage do not allow for this.

For you to get the full benefit of overpaying, especially if you intend to do it regularly, is to take out a mortgage with interest that is calculated daily or monthly, rather than yearly.

If you have substantial savings, an offset mortgage may be an option for you. This takes into account the amount of savings you have, and counting that towards the total mortgage sum. Interest is then just calculated on monies over and above the amount of savings. For example, with mortgages of £100,000 and savings of £20,000, interest would only accrue on £80,000. Your monthly payments would remain the same, so you would, in effect, be overpaying, and reaping the benefit of having a shorter mortgage term.