Mortgage blog: One fifth of Brits resolve to get out of debt in 2014
What are your New Year's resolutions? If you want to take more control over your finances, you're not alone. A leading voucher website has found that over half of Brits' number one resolution this January relates to their finances with just under a third saying they want to save more and a fifth pledging to reduce their debts.
One of the most effective ways that you can reduce your debt is to start overpaying on your mortgage. Here, we look at the advantages of this and how you go about making extra payments to your home loan.
Save thousands in interest by paying a little bit extra to your mortgage
If you have a little bit of surplus cash, making extra payments to your mortgage has two main benefits, as Keith Osborne from Whathouse.co.uk explains: "Firstly, you will reduce your total interest costs as you pay back the loan more quickly. Secondly, you will often find that it takes you less time to repay your mortgage and you will clear your debt in fewer years than you anticipated.
Figures in the Guardian show that even a small overpayment can make a huge difference. On a 25-year £150,000 mortgage with an interest rate of 3.5%, if you overpay by £50 per month it will reduce your total interest costs by £7,483 and you will pay off your loan two years and four months early.
If you can afford a larger overpayment the benefits are even more striking. On the same mortgage, a £250 a month overpayment would see you save nearly £28,000 in interest and you would repay your home loan eight-and-a-half months early.
As well as interest savings, there are other benefits to overpaying. Next, we look at these, and how you go about paying extra.
Check your mortgage terms and conditions before overpaying
"One further benefit of overpaying on your mortgage is that it will reduce your loan-to-value ratio, which makes it easier to remortgage to a more attractive deal," adds Keith Osborne from Whathouse.co.uk. "By reducing your loan-to-value to 80% or 75%, you'll get a better choice of deals at lower interest rates."
Before you decide to overpay, check the terms and conditions with your lender. Many deals will allow you to overpay up to 10% of your outstanding home loan each year without penalty. If you're on a flexible, lifetime tracker or your lender's standard variable rate you may well be able to overpay by as much as you like.
And, you don't have to overpay monthly. Most lenders will let you pay in lump sums on an ad hoc basis. "If you have higher interest debts such as loans or credit cards then it is often more beneficial to repay these first," says Osborne. "However, if you can afford to pay a little extra to your mortgage then now could be the perfect time to start chipping away at your debt."
Click here to find out more about how Whathouse.co.uk can help you find the right mortgage.