NatWest announced in February that its mortgage clients will be able to overpay their mortgages by up to 20% of the outstanding loan balance, up from 10%. But what does this actually mean? Is this good news? What is an overpayment even?
In this blog, we’ll explore what a mortgage overpayment is, who it applies to and what it means for borrowers.
Making overpayments on mortgages means paying extra in addition to your required monthly payment. Simply put, if your monthly repayment is £1,000, but you happen to have a bit extra left in the bank this month (say £250), you might want to pay this off your mortgage. So, for this month, you will pay £1,250 off your mortgage.
With reference to the move by NatWest, this means that if you have an outstanding balance of £250,000 on your mortgage, you can now overpay your mortgage by £50,000 (or 20%), over the term of your mortgage, which is considered very generous. This change applies to both existing clients and new borrowers. It has certainly made NatWest stand out from the crowd as no other lender, as far as we know, has followed suit.
Overpaying on your mortgage can help reduce the total interest paid over the life of your loan and shorten the mortgage term – basically your mortgage becomes cheaper and shorter meaning your debt is paid off quicker.
Overpayments can benefit a range of people, including self-employed individuals or those who are salaried but rely on commission, and may have irregular income or receive bonuses or overtime, as they can use this extra cash to reduce their mortgage balance.
They are also particularly useful for those with long-term mortgages (longer than 25 years), as it can help to reduce the overall interest paid over the life of the loan and shorten the repayment period. By reducing the interest paid, borrowers can save significant amounts of money in the long run.
However, there are also some important points to consider when it comes to overpayments.
Not all mortgages allow for overpayments. If you try to make overpayments, you may find that you are just not physically able to make the payment. A mortgage adviser will be able to go through the terms of your existing mortgage to clarify this and, if you decide that you want to transfer to a mortgage that does allows for overpayments, they will help you seek out an alternative mortgage product.
Another key consideration is the possibility of early repayment charges. Some mortgages may come with penalties for early repayment, which can negate the benefits of overpayments. Again, it’s worth speaking to an expert mortgage adviser who will be able to calculate this for you and help you to decide whether it’s financially worth your while.
Another factor to consider is the opportunity cost of overpaying on a mortgage. If a borrower has other higher interest debts, such as credit card debt, it may make more financial sense to pay off those debts before making additional mortgage payments.
It might seem tempting to pay off your mortgage as quickly as you can, and to throw every spare penny at it, but it’s also important to keep some savings on hand. We typically recommend having an emergency fund equivalent to three months’ salary, as unexpected expenses can arise at any time. Keeping some savings on hand can help ensure that borrowers can manage these unexpected costs without needing to take on additional debt.
In summary, overpayments can be a useful tool for those looking to reduce their mortgage balance and shorten their repayment period. However, borrowers should carefully consider the potential benefits and drawbacks of overpayments, including the possibility of early repayment charges and the opportunity cost of not paying off higher interest debts first.
If you’d like to speak to us about any aspects of your mortgage, or to discuss your borrowing requirements, please give us a call and we’ll be happy to help.