In this blog article we aim to explain how if you overpay your mortgage now you could save thousands of pounds in the long term.
Overpay your mortgage
A mortgage is like any other kind of debt. The longer you take to pay it off, the more it will cost you. So, if you overpay your mortgage whenever possible you may be able to save thousands of pounds and be mortgage free much earlier.
If you pay your mortgage off over a shorter term then you will have to pay more each month, but if you can afford it it’s worth doing. Why not call your lender and ask how much your monthly payments would be if you reduced the mortgage term by, say, 5 or 10 years. If you can manage the new monthly payments then it would be worth seriously considering this.
With some mortgages you can even arrange with your lender to pay off extra lump sums during the year as and when additional spare money comes in. Many lenders will allow you to pay lump sums of up to 10% of the mortgage debt even within a penalty period.
Paying off your mortgage quickly is also a tax free form of investing.
If you have some extra money to invest you could put it into a savings account but unless you put it into a cash ISA you would pay tax on any interest you make.
However, if you put that money towards paying off your mortgage you won’t be taxed on it as the Inland Revenue doesn’t think of this as investing but as paying off a debt.
Watch the penalties
Some mortgages have penalties if you overpay your mortgage more quickly while they are in the product period although many will allow you to pay up to 10% of the debt each year without penalty.
If there are penalties at present but you are able to save extra money each month, consider putting the additional cash into a high interest savings account while you’re in the penalty period. When your penalty period expires you can then pay a lump sum off the capital.
Watch the fees if you switch
You may want to consider switching to a lower rate mortgage. There are lots of very good low interest rates on the market so if you are not tied to a penalty period you may be able to save money by remortgaging.
However, you need to be careful about the potential costs involved in remortgaging including the new lender’s arrangement fee, legal costs and valuation fees although it may be possible to avoid all of these.
Rent a room
One very easy way to reduce the mortgage term without sacrificing your quality of life is to rent out a spare room.
It is even tax efficient as the tax man allows you to obtain income of up to £4,250 per year (£350 per month) without being liable for any income tax.
You can take advantage of the scheme as long as the room you are renting is furnished and in your own house; not a separate property.
According to Spareroom.co.uk, depending on where you live, taking in a lodger and using the money to overpay your mortgage can halve the number of years it takes to pay it off.
Article courtesy of Express.