Overpay On Your Mortgage!
A mortgage can be your biggest obstacle towards financial freedom. Committing to paying £500-£1000 each month for 25-30 years is one of the main reasons that people feel they have to work indefinitely.
Did you know that you can reduce your mortgage considerable by overpaying each month?
When you make your standard monthly payment the majority of the instalment goes towards paying off the interest on the loan. In the early days it can be as high as 95%.
Overpaying each month means contributing more than your regular payments by paying off more of the capital of the mortgage.
In my circumstances, overpaying £1.00 now will save me £2.50 during the term of the mortgage. In fact if I overpay by £250 per month then my mortgage term is reduced by 12 years and I save approx £45k in interest. This is a much better return that the current bank savings rates so paying off your mortgage can be a very smart thing to do. It may seems very boring in the short term but will put you in a much better financial position later on in life.
Don’t pay off your mortgage if….
There are certain circumstances where it does not make sense to contribute more towards your mortgage:
- If you have a credit card debt then this is at a much higher interest rate than your mortgage. Pay this off first.
- Don’t put all your spare monthly cash into your mortgage as you should be saving a proportion of your income into an emergency fund. This is vital if you lose employment for any period of time or have any big unforeseen expenses.
- Most mortgages will allow you to overpay a percentage without penalty (usually 10%). You need to check with your mortgage lender as any financial penalty they levy will outweigh the good from the overpayments.
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