Save thousands by overpaying your mortgage

A HOMEOWNER could save thousands over the lifetime of their mortgage by increasing their repayments by €100 per month.

A €250,000 loan over 25 years at a rate 4.5% will cost €1,267 per month. Total interest will be €206,000, while the total cost of the loan is €456,000.

If, however, a homeowner pays an extra €100 per month, they will reduce the mortgage term by four years and the total cost of the loan will be €423,000, a saving of €33,000.

Operations manager with Irish Mortgage Brokers, Karl Deeter, said overpaying a loan is a great idea if you can afford it.

“It is a simple mechanism that people can understand and it gets you out from under a debt faster. It also doesn’t require much more discipline than saving the same amount,” he said.

Using the example of a €300,000 loan over 30 years on a rate of 4.5%, if a mortgage holder overpays their loan by €126.67 each month, they can knock €41,000 off the total cost of their mortgage and reduce the term by four years and four months.

Director of the Irish Mortgage Corporation, Frank Conway, said mortgage holders must ensure, however, that additional repayments are applied to capital reduction.

He said another option is to pay on a shorter loan term. Using the above example, again, assuming for a 30-year term, the monthly repayments are €1,520. Applied over the full term of the loan, the borrower repays €547,221. This means that the total cost of interest is €247,221.

However, if that same loan was repaid over a 15-year term, the monthly repayments would increase to €2,294.98 but the total payments over the 15-year term would amount to €413,096 and the total cost of interest would be €113,096 — a saving of €134,125.

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