When it comes to paying off your mortgage early, there are two main options: overpaying your mortgage or using an offset mortgage. Both options can help you pay off your mortgage quicker, but each has its own advantages and disadvantages.
We have previously written about Offset mortgages as well as the Pro’s and Con’s of overpaying your mortgage but the above question is one which arises when discussing with clients the best mortgage option for them when they might currently, or in the future, have access to amounts of capital which they could either pay down their mortgage with or save.
On a simple level, the majority of high street mortgage lenders offer mortgages that are flexible in that they will allow between 10-20% of the capital you owe to be repaid in addition to your usual mortgage payments each year. Any capital payment above this may incur an Early Repayment Charge if these apply to your mortgage especially if it is a fixed rate so it is best to seek advice prior to making a capital payment to your mortgage. What they will not necessarily offer is the ability for you to retain access to that capital if you need it at a later date. That is where an Offset mortgage may prove to be more beneficial.
Overpaying your mortgage and reducing the amount owed will assist you with reducing the cost of your borrowing as less interest will be paid. Simply, when you owe less you will pay less. However, once a capital payment is made you can rarely get that money back, it’s now tied up in the bricks and mortar. Alternatively, an Offset will see you potentially save on mortgage interest while also being able to access the money in the future if you need to. For example, a change in your income or health may see the benefit of having access to ready cash for the then and there as of greater importance than reducing borrowing costs.
We will explore the benefits of overpaying your mortgage versus using an offset mortgage in the UK.
Overpaying Your Mortgage
Overpaying your mortgage simply means making additional payments towards the principal amount of your mortgage. This can be done on a monthly basis or as a lump sum payment. By doing this, you can reduce the amount of interest you pay over the life of your mortgage and potentially pay off your mortgage early.
The benefits of overpaying your mortgage:
- Save Money on Interest: When you overpay your mortgage, you reduce the amount of interest you pay over the life of your mortgage. This can potentially save you thousands of pounds in interest payments.
- Shorten the Mortgage Term: Overpaying your mortgage can also help you pay off your mortgage earlier. This can be particularly beneficial if you are looking to retire or reduce your monthly expenses.
- No Fees: Overpaying your mortgage does not come with any fees or charges. You can overpay as much as you want without worrying about any penalties.
- Flexibility: Overpaying your mortgage is a flexible option that allows you to choose how much you want to overpay and when. You can choose to overpay a little each month or make a lump sum payment when you have extra cash.
Offset Mortgage
An offset mortgage is a type of mortgage that allows you to use your savings to offset the amount of interest you pay on your mortgage. This means that the interest you pay on your mortgage is calculated based on the difference between your mortgage balance and your savings balance.
The benefits of using an offset mortgage:
- Save Money on Interest: Like overpaying your mortgage, using an offset mortgage can help you save money on interest payments.
- Access to Your Savings: With an offset mortgage, you can still access your savings whenever you need them. This can be particularly beneficial if you have unexpected expenses or emergencies.
- No Tax on Savings: Because your savings are used to offset the amount of interest you pay on your mortgage, you do not pay any tax on your savings.
- Flexibility: An offset mortgage is a flexible option that allows you to overpay your mortgage if you choose to do so.
Both overpaying your mortgage and using an offset mortgage can help you pay off your mortgage quicker and save money on interest payments. However, overpaying your mortgage offers more flexibility and does not come with any fees or charges.
Additionally, if you are overpaying your mortgage, you can choose to make a lump sum payment when you have extra cash, which can potentially help you pay off your mortgage even earlier.
“Offset Mortgages are not for everyone, but over the years I have had new clients come to me that have regretted paying capital off their mortgage in the past as they could have done with that money for other reasons in the future,”
Chris Lees, Mortgage and Protection Director at Resolve.
Ultimately, the choice between overpaying your mortgage and using an offset mortgage will depend on your personal circumstances and financial goals.
Weighing up the benefits (and consequences) of both scenarios is a part of the advice process when discussing with clients fortunate enough to be in a position to have access to capital lump sums and obtaining suitable advice on what will work best for you is key.
If you would like to discuss the two options above with one of our mortgage advisers, then please get in touch.
Please note: Your home may be repossessed if you do not keep up repayments on your mortgage or other loans secured on it.