Q I have a mortgage with just over €250,000 remaining. It’s variable rate of 4.5% with 23 years remaining. This will bring me up to 66 years of age so I am thinking of paying extra off my mortgage to try and get the term reduced. I have about €100pm to spare but I heard that even this amount could reduce the term and save me thousands in interest too. Is this a good idea and what’s the best way to proceed?
A mortgage of €250,000 over 23 years @4.5% should be costing you €1,455.80pm. If interest rates remained the same for the entire mortgage term, from today you would pay back about €401,731.80 before your mortgage is cleared. Overpaying your mortgage, even by €100 could save you upwards of €18,137.36 and cut almost 1.5 years off your repayments – here’s what to consider
This is a significant saving that’s worth the effort of putting some money aside every month. Homeowners can save thousands of pounds on their mortgages by overpaying their loans by just €100 a month, but there are certain factors to consider first.
One of the main benefits of overpaying your mortgage is reducing the amount of interest you will pay.
Mortgages will typically accrue a large amount of interest over the years, but by overpaying your mortgage you can reduce the amount of extra cash you will have to fork out and reduce the length of time you’ll be paying.
Beyond the interest savings, overpaying a mortgage can give people peace of mind. Allowing you to own your home outright sooner and have a solid sense of financial security. Plus, once your mortgage is paid off, you’ll have far more disposable income each month, which you can then use for other financial goals such as saving up for your retirement or saving up for a holiday.
However, there are certain factors people should take note of before making the decision to overpay their mortgages. First and foremost, a big thing to consider before overpaying is whether your mortgage agreement allows overpayments or has an overpayment limit. Some lenders will impose limits and even penalties when it comes to overpaying if you are on a fixed rate, meaning you might end up out of pocket overall if you don’t read the fine print. If you’re not sure, it’s best to get advice or speak to your lender before making any payments.
Additionally, people should balance the benefits of overpaying a mortgage with their current needs before signing up for anything. While it can be beneficial in the long term, if you’re only going to save a year or two from your mortgage term but are struggling every month to put the money together it may be better to see out your term in full.
Even minimal amounts are worthwhile. If you can only afford to overpay €50 a month, this could save you €9,667.47 in interest alone, and clear your debt just over one year earlier. We always recommend that overpayments are made via standing order. This means you re not committed to this repayment and you can amend the amount(s) at short notice if your circumstances change either for the better or worse.
If you are lucky enough to have money sitting in a current account, another option could be to check if your lender allows lump sum overpayments. This can be a great way to make your money work for you. See examples below:
A €10,000 paid off the loan will provide two options and either will save thousands in interest and clear mortgage earlier.
- Reduce the repayments to €1,397.33pm and save €16,068.72 in interest.
- Keep repayments at €1,455.55pm, clear the mortgage 2.5 years early and save €27,247.90 in interest.
Finally
Get advice from a Financial Broker to help determine if there is a better use for the cash instead. If you have any higher interest-bearing debt like a credit card or overdraft you should consider paying this first for example.
If you want to go ahead, you must make it very clear what you’re doing and for how long, in the case of regular overpayments.