Martin Lewis and his Money Saving team have released a handy guide on what to do when it comes to saving or overpaying on your mortgage.
The money expert stated that overpaying on your mortgage often wins over savings - but not always. On the Money Saving Expert website, Martin explains: "Get it right and overpaying your mortgage can be a huge cash boost, because you'll be eating into the debt you've built up from buying a home, meaning you can be mortgage free sooner.
"But working out whether overpaying your mortgage is right for you isn't always straightforward."
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Other benefits of overpaying include not paying interest on the amount you overpay, and the money you save on interest beats the returns possible by putting it in savings.
However, there are steps to take before just paying into your mortgage straight away. The first thing to do is check whether you should overpay your mortgage or save the cash elsewhere.
The simple rule of thumb according to Martin is if your mortgage rate is around the same, or higher than your savings rate, then it makes sense to overpay.
That's because when it comes to savings, the reverse isn't automatically true. A higher savings rate could beat overpaying your mortgage, but it won't always.
It will depend on a number of things, such as:
whether you are planning a one-off overpayment
if you want to overpay regularly over the longer term
how much your mortgage debt is
how many years you have left to repay your mortgage
Martin also included a handy guide on what you can save if you overpay your mortgage by certain amounts. This is below.
| SAVING/ OVERPAYMENT PER MONTH | MORTGAGE TERM REDUCTION | TOTAL INTEREST SAVED OVERPAYING A £150K MORTGAGE AT FOUR PER CENT | INTEREST IF YOU SAVED THE OVERPAYMENT AT THREE PER CENT |
|---|---|---|---|
| £10 | Six months | £2,092 | £1,400 |
| £50 | Two years, five months | £9,508 | £5,840 |
| £100 | Four years, four months | £17,082 | £9,585 |
| £200 | Seven years, five months | £28,429 | £13,400 |
| £500 | 12 years, eight months | £47,457 | £15,630 |
| £1,000 | 16 years, nine months | £61,285 | £13,450 |
You can save such large sums of interest by overpaying because it doesn't just get rid of the debt – it gets rid of the interest you would have paid on that bit of borrowing in the future too.
Another handy thing on the Money Saving website is a mortgage overpayment calculator, created by Martin and his team. This calculator lets you put in both one-off and recurring mortgage overpayments.
As well as that, it also gives you an indication of what you'd earn in interest if you put your cash in a savings account instead.
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