A mortgage is the biggest financial commitment that most of us will have to make during our lifetime, so the idea of being mortgage-free is understandably appealing. Coupled with the ultra-low mortgage interest rates available at the moment it can make financial sense to chip away at your mortgage rather than put any extra cash into savings.
Indeed, overpaying your mortgage by just £100 each month could cut more than 5 years off a typical mortgage, and help you avoid more than £8,500 in interest. However, some people may not explore the option of overpaying their mortgage as they believe that they have to commit to sizeable regular payments but that is not the case. In fact, there are a number of apps that can help you start overpaying your mortgage while you shop, by rounding up your spare change or by providing cashback. It means you can start overpaying your mortgage without it impacting your finances or lifestyle.
Should you overpay your mortgage?
There are advantages and disadvantages to overpaying your mortgage, and you should consider both carefully before you begin so that you don't wind up strapped for cash in the process.
- You could pay off your mortgage more quickly, making that mortgage-free lifestyle a reality.
- You could make savings on interest you would have had to pay further down the term of the mortgage.
- Can you reasonably afford to overpay? Increasing your monthly repayments should not come at the expense of the quality of life you lead or cause any other financial pinch-points. Overpaying is completely optional, and if you can't sustain a healthy standard of living while doing so, then it probably isn't worth it.
- Beware of early repayment charges. Check your mortgage contract carefully because some lenders charge a fee for overpayments (some can be up to 5% of the amount overpaid). Introductory rate mortgage deals sometimes allow early repayments with no additional charges, but this can change once you switch to the standard variable rate, so read the small print thoroughly.
For more information on the advantages and disadvantages of overpaying your mortgage, visit our article "How to pay off your mortgage faster – and is it a good idea?".
Can you afford to overpay your mortgage
Before making the commitment to overpay your mortgage, you need to decide if it's a suitable option for you and so there are a few questions you should ask yourself, such as:
Do you have lots of outstanding debt?
It may be a better idea to put any extra income you have into paying off personal loans or credit card debt before increasing your mortgage repayments. The average mortgage has a 25-year term, but other debts tend to be much shorter, so you should prioritise these before trying to amp up your monthly repayments. Remember that overpaying your mortgage is not a requirement, so if you have more pressing financial commitments, put these first.
Have you got a sufficient emergency fund?
Most of us have a little bit of money in savings for unexpected expenditure, but a good rule of thumb is to make sure that you have an amount equal to 6 months net salary to cover you for basic outgoings such as mortgage payments and utility bills, should you happen to fall on hard times. An emergency fund can be used to cover anything from redundancy to ill health, but ensuring you have sufficient savings to fall back on could prove a valuable lifeline if things get tough.
If you haven't started to build your own emergency fund, check out our article "Building an Emergency Fund – the what, why & how" to find out how.
Would you be better off keeping your money in savings?
You may be better off putting your money in a savings account rather than overpaying your mortgage, assuming you can get a higher rate of interest on your savings than the rate you're paying on your mortgage. The reality is, however, with interest rates at historical lows, savings rates are particularly poor and so it makes sense for most people to consider overpaying their mortgage than sit on slow-growing savings.
For more advice on deciding between overpaying and saving up, head over to our article on whether or not it's a good idea to overpay your mortgage.
Apps to help you overpay your mortgage
If you're content that overpaying your mortgage is the right step for you, there are a number of mobile apps which you can use to help round-up your spare change, earn cashback and even compartmentalise your savings in order to make overpaying easier. We list some of the best mobile apps to help you with overpaying your mortgage below.
Accelerate My Mortgage
Accelerate My Mortgage is a cashback app that rewards you with money back when you spend online at any of its 100+ retail partners, including eBay, BT, Marks & Spencer, Boots, Trainline, B&Q, Halfords, and Pizza Hut. The cashback you earn accumulates in the account on your app and, when your balance reaches £50, Accelerate My Mortgage will be in touch to request permission to pay the sum directly to your mortgage lender. If your lender doesn’t allow payments from a third party or has a minimum amount you can overpay in one go, Accelerate My Mortgage can pay the money directly so you can overpay the loan yourself.
Moneybox is an app that rounds up purchases you make on your card to the nearest pound and puts the spare change either in a savings or investment account, which you could then use to fund your mortgage overpayments. There are a range of products to choose from, including a Stocks and Shares ISA, a General Investment Account, a Stocks and Shares LISA, a Junior ISA, a Socially Responsible investing account, or savings accounts including a “Simple Saver”, a 45 day notice account, a 95 day notice account, or a cash Lifetime ISA. Moneybox does not currently have a feature that allows for mortgage overpayments and so you would need to contact your lender and withdraw any investments or savings into your bank account before making the payments yourself.
Emma is a mobile budgeting app that combines information from all of your bank accounts, savings accounts, credit cards and investments in one place to help you optimise your saving potential. You can use it to help you to plan out your monthly expenditure, identify wasteful subscriptions and calculate how much you can (reasonably) afford to commit to mortgage overpayments. There is no facility to overpay your mortgage directly from the app and so you would need to contact your lender and handle the overpayment process yourself.
TopCashback is a cashback app that collates cashback offers on everything from airport parking & car hire, home insurance, and mobile phones to fashion and homeware brands. It helps you to accrue cashback in a mobile account, with earnings that you can send directly to your bank account. There is no feature to overpay your mortgage within the app and so you would need to handle the overpayment process yourself.
Plum is a savings and investment app for your mobile that analyses your spending and automatically saves your money for you, so you don't have to. It uses artificial intelligence to analyse your monthly spending and calculate how much you can afford to save each month. You have the option of keeping your funds in either an interest-free or interest-paying "pocket", as well as invest in a Plum Stocks and Shares ISA or a General Investment Account. Plum does not offer a mortgage overpayment facility and so users would need to withdraw the money and handle any overpayments with the lender directly.
Banks that can help you overpay your mortgage
There are a few banks that offer schemes designed to boost your savings which can be used towards overpaying your mortgage. None of the banks currently offer any features that automatically overpay your mortgage and so it would be your responsibility to contact your lender and handle the overpayment process yourself.
Lloyds' "Save the Change" scheme enables you to accrue daily savings when you buy something with your Lloyds debit card by rounding up the amount you spend to the nearest pound and transferring the difference into your nominated Lloyds savings account. You are then free to use the extra cash as you wish, and it could provide a welcome boost to your overpayment fund.
Monzo has a “Salary Sorter” which sorts your monthly salary when you get paid into three areas - spending, saving and bills. The feature ensures that you can budget effectively for each month, as well offering a fixed spending budget which can control your expenditure on luxuries such as eating out and clothes shopping. It also has a savings pot to help you save up for future goals, such as paying off your mortgage early.
Starling Bank also offers a couple of savings-boosting features, including round-ups, categorised spending so you can track where and on what exactly your money is being spent, and savings pots that you can use to put money away each month for your mortgage overpayments.
Alternatives to overpaying your mortgage
If overpaying your mortgage isn't the right move for you, you do have some alternatives.
As the goal is to pay your mortgage off early, you may consider asking your lender to reduce your mortgage term, which increases your monthly payments. This does the same thing as overpaying on a monthly basis or in chunks at your discretion, but it ties you into paying that increased amount for the entire term of the mortgage.
This option is not for everyone, and could become problematic if your financial situation changes and you find yourself struggling to keep up with the higher repayments. By simply overpaying your mortgage, you can always go back to paying the original amount every month, so the stakes aren't as high. On top of this, you may be more likely to be approved for a mortgage payment holiday by overpaying as and when you can, as you would have built up a solid history of responsible repayments.
But, if you're absolutely committed to putting a dent in your mortgage debt, and you're certain that you can afford it, you can reduce the term of your contract when you remortgage. For more details on how much you could save by reducing your mortgage term, check out our article "How to pay off your mortgage faster – and is it a good idea?".
Consider an offset or flexible mortgage
Flexible mortgages allow you to overpay your mortgage by as much as you like, whenever you like, without having to pay any kind of early repayment charge or penalty. They also let you underpay or potentially take mortgage holidays, so you'll have a greater deal of freedom to manage your finances than a standard fixed-rate mortgage.
An offset mortgage works by linking a savings and mortgage account, with the money in your savings pot offset against your mortgage balance meaning you only repay interest on your mortgage debt minus the amount you have in savings. For example, if your mortgage is £100,000, but you have £25,000 in the savings account linked to your mortgage, you would only pay interest on the £75,000 - the difference between the two.
Either of these kinds of mortgage can give you a completely different experience than a typical rigid fixed-rate mortgage, and could be a better fit to your lifestyle and goals than committing to spending more on overpaying on your existing contract. For more information and some key points for the different types of mortgage on the market, watch our Millennial Money breakdown on "What are the different types of mortgages?".
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