Post lockdown mortgage overpayments can be a “smart move”, but borrowers need to be “careful” | Personal finance | Finances
The series of lockdowns on the coronavirus over the past year has resulted in major lifestyle changes. And while millions have sadly felt the financial repercussions of the Covid pandemic, fortunately some have saved up while being told to stay home.
According to the Mental Health Report of the digital financial coaching app Claro, which was created in collaboration with Mental Health UK and The Money Charity, 20 percent of Britons used the lockdown as an opportunity to improve their financial situation.
Meanwhile, research by the financial services association Wesleyan found that savers pocketed an average of £ 35 more per month during the pandemic, with average monthly savings increasing from £ 240.23 before the pandemic to £ 276 per month.
Homeowners lucky enough to have accumulated savings during the lockdown may wonder if using that money to shorten their mortgage term might be right for them.
This was discussed recently by James Andrews, Senior Personal Finance Editor at www.money.co.uk.
Speaking exclusively to Express.co.uk, he explained that mortgage overpayments could be beneficial for some homeowners.
“Using the savings accumulated during the lockdown to overpay your mortgage can be a smart move for homeowners looking to settle their debts sooner,” said Andrews.
“Overpaying a mortgage can save you thousands of pounds in interest costs too.
“For example, if you overpayed £ 200 a month on a £ 200,000 mortgage, you could save £ 21,622 in interest.
“You would also pay off your debts and be mortgage-free five years and 11 months faster.
“This example is based on an interest rate of three percent and a term of 25 years.”
However, Mr Andrews has issued a warning when it comes to overpaying a mortgage.
“There are a few points to look out for, though,” he began.
“First, most lenders put a limit on how much you can overpay with no penalty – usually £ 500 per month, or 10 percent of the total loan per year.
“If you exceed that amount, you could face charges.
Second, some mortgages allow you to borrow money that has been overpaid.
“If yours does not allow this, it is wise to withhold some savings instead of using it all on your mortgage.
“The last thing you want is an unexpected bill that means you have to take out an expensive loan that far exceeds the savings you get on your mortgage.”
For those who are unsure if it is right for them, using an online mortgage overpayment calculator can help make the decision.
“To gauge how your lockdown savings could help pay off your mortgage, money.co.uk has a mortgage overpayment calculator that can show how your term and interest payments could be reduced,” said Andrews.
“Just fill in details about your outstanding balance, the remaining term of the mortgage, the annual interest rate, whether you want to pay recurring or one-time overpayments (or both) and how much you want to overpay.”