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Sunday, December 5, 2021

‘I would have paid £100,000 in interest’: when you should (and shouldn’t) overpay your mortgage

Samantha Bayliss, 36, began overpaying on her mortgage when she bought her first home aged 24. “I worked out that I would be paying the bank in the region of £100,000 in interest across the lifetime of the loan. 

“I had bought on my own and had already been paying expensive rent in Oxford, so could afford to budget a bit more than required towards my mortgage. It began with just £100 extra a month, but over ten years this gradually increased.

“I have been made redundant twice in my life and overpaying each month gave me the security that I wouldn’t fall behind on payments if times ever got rough,” she added.

When Ms Bayliss moved to her next home, she had gained enough equity in the property to secure a better rate on her new mortgage and afford a larger mortgage. “I moved from a one-bed property to a four-bed house,” she added.

Should you overpay?

Most mortgage lenders allow borrowers to overpay up to 10pc  of their loan each year without additional fees. But it is not always the best use of spare cash. Interest rates on other debts, such as credit cars and car loans, tend to be much higher than mortgage rates, so paying off these first is wise.

David Hollingworth, of L&C Mortgages, a broker, said: “It is also key to understand that making overpayments on a mortgage is less flexible than keeping cash in savings or investments. Once that overpayment is made, you can’t get it back.”

Savings might also be better invested in stocks and shares too, especially if the mortgage has a long term. 

Brian Brown, of Defaqto, said: “There is a high chance that investing a lump sum of cash in, say, a stocks and shares Isa over the course of 20 years could earn a better return than the interest savings made on overpaying a mortgage, especially if mortgage rates are low. 

“It takes discipline not to touch that cash for two decades, however.” 

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