Should I make overpayments on my mortgage?
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I have just inherited £30,000 from my grandmother and I wonder if I should use at least some of this to overpay my mortgage? Interest rates are really low for savings accounts, so this seems like the best use of my money. What do you think?
Diane Fish of Smith & Pinching responds:
Whether or not it is a good idea to make overpayments on your mortgage will depend on where you currently are with your repayments, what fixed-rate period you are in (if any) and the rest of your finances. It’s also important at this point to think about what backup funds you have available for emergencies and what additional purchases you might want to make in the years ahead that won’t be affordable under your normal budget.
Overpayments are possible on most mortgages. For those still in a fixed-rate period, overpayments may be limited by the lender – typically they may allow up to 10pc of your mortgage balance per year without imposing a penalty. Anything above that figure may involve costly charges. However, some lenders/products will impose penalties whatever overpayment you make.
If you are outside your fixed-rate period or any product period, the amount of the overpayment could be unlimited. However, it may make sense to look at re-mortgaging for a lower amount and so take advantage of both a lower sum borrowed as well as potentially a better rate, at least for another initial fixed period.
If you do decide to make an overpayment, you can use it to improve your position in two ways. You could perhaps reduce the amount you are paying back each month, for the duration of the term of the insurance. Alternatively, you could continue your repayments at the same rate as before and shorten the term so that it is paid off earlier than originally planned. This will be something the lender would advise you upon according to their terms regarding overpayments.
I suggest you speak with an independent mortgage adviser to look at the feasibility of making overpayments on your current mortgage, and at the alternative options available to you.
Your home may be repossessed if you do not keep up payments on your mortgage. There will be a fee for the mortgage advice. The precise amount will depend upon your circumstances, and the type of lending taken. Smith & Pinching’s minimum advice fee is £950. Any opinions expressed in this article do not constitute advice.
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