Q I took a five-year fixed-rate mortgage final summer season and was fortunate sufficient to only miss the rising rates of interest. I’m trying forward, as issues might nonetheless be tough in 5 years, and so I plan to overpay as a lot as I can. Does it make a distinction how I overpay? Wouldn’t it profit me extra to make a month-to-month cost or a bigger lump sum on the finish of every yr?
A For those who had mentioned “bigger lump sum at first of every yr”, I’d have mentioned lump sum each time. But when the selection is between chipping away at your excellent mortgage by making month-to-month overpayments – which reduces the quantity of curiosity you pay – and ready till the tip of the yr to deliver down your mortgage steadiness, I’d say month-to-month overpayments could be extra useful. However each solutions assume that you just don’t incur penalty fees by overpaying an excessive amount of.
So earlier than you arrange overpayments in your mortgage, it’s essential to ask your lender what your annual overpayment allowance is. That is the quantity you’ll be able to overpay every year with out incurring any early compensation fees. With fixed-rate mortgages that is usually 10% of the mortgage mortgage, though a handful of lenders allow you to overpay as much as 20%.
You additionally have to look intently on the element to keep away from going over your lender’s restrict. At Nationwide constructing society, for instance, the restrict is 10% a yr of the unique mortgage quantity (for all mortgage merchandise reserved on or after 29 Might 2013, besides for traditional mortgage price and base price mortgages the place no limits apply). So the quantity you’ll be able to overpay stays the identical for the entire of the mortgage time period.
At HSBC, Santander and Yorkshire constructing society, nonetheless, the ten% restrict is utilized to the excellent steadiness every year, so the quantity you’ll be able to overpay goes down. At HSBC, the yr’s restrict is reset yearly, both on the date your mortgage account was opened or the date you switched to a set price. At Santander the restrict applies to a calendar yr, so it’s reset on 1 January.
The opposite factor it’s essential to clarify to your lender is that you really want your overpayments to have the impact of lowering your mortgage time period slightly than lowering your month-to-month cost.