Consumer Corner: How much could I save if I overpay my mortgage?

Should I overpay my mortgage?

There’s a bit of advice that keeps cropping up from the school of sensible people. Of course, we hear about the value of investing in pensions but another tip we often head is that if you have extra cash overpaying your mortgage if a great bet. 

This can fall on deaf ears for anyone who may be struggling to just pay their mortgage in general but if it is something you can do there can be enormous benefits. 

It could be the case that you have come into some additional cash and wondering how to invest it or if should you save it. 

According to those in the know paying a bit extra on your mortgage each month could in fact save you thousands of euro over the long term and is a great way to use any spare cash you may have.

Trevor Grant, chairperson of the Association of Irish Mortgage Advisors (AIMA) points out that while it may seem counterintuitive to part with more money than your monthly mortgage payment requires, paying off extra on your mortgage is a prudent financial move can save you even tens of thousands of euro in the long run.

“One of the most compelling reasons to overpay on your mortgage is the substantial savings on interest payments. The larger your mortgage, the greater the interest bill that clocks up on it, often costing homeowners more than the principal itself. As overpaying your mortgage reduces the amount you owe, it will, in turn, reduce the total amount of interest you'll pay over the life of the loan,” he said.

For a homeowner with a mortgage of €300,000 at 4.25% interest over 30 years, they could save €9,200 by paying off a lump sum of €10,000 off their mortgage or they could save €18,400 by paying off a lump sum of €20,000. In addition by overpaying €100 monthly, they could save €35,000 over the term of the mortgage, and nearly €61,000 by overpaying €200 monthly.

Joey Sheahan, head of credit at MyMortgages.ie and author of the Mortgage Coach said although overpaying has benefits, he would advise homeowners to give careful consideration as to whether they have access to a rainy-day emergency fund before using all savings to reduce their mortgage amount.

“If, once a full financial review has been completed, a person finds that they have a sufficient rainy-day fund, then any or all of the additional funds could be used to pay down some of their mortgage, which could make a really big financial impact and could ultimately save them thousands and cut their mortgage term by years,” he said.

AIB is one bank that recently contacted customers to let them know about their “fixed rate mortgage overpayment” feature. It said all fixed-rate customers will be allowed to make payments over the normal regular payments on their mortgage up to €5,000, with no early repayment charges. 

In its correspondence with customers, it pointed out that an overpayment would reduce the cost of credit of their loan, which in turn would reduce repayments.

Bank of Ireland also offers customers the chance to overpay, saying  "even a small overpayment can make a difference to your mortgage". Customers can make overpayments, either regularly or as lump sums, when they find themselves with extra cash. Customers on a fixed rate can overpay up to 10% of their normal monthly repayment, without incurring a fee.

Mr Grant said you could typically overpay your mortgage by either paying a lump sum off your loan or by increasing your monthly repayments. However, this will depend on the lender and the type of mortgage you have.

“If, for example, you have a lump sum sitting in a deposit account earning little to no interest, it might be worthwhile utilising it to pay off your mortgage,” he said.

Mr Grant pointed out that another major advantage to overpaying on your mortgage is that it expedites the process of paying down your home loan. As you make extra payments, you reduce the outstanding balance more quickly, which means you'll own your home outright sooner.

“Even if you are in a fixed-rate contract, don’t assume that you have to pay early repayment fees,” he added.

Overpaying on your home loan can also lead to a mortgage-free retirement, as paying extra on your mortgage can help shorten the loan term.

“This not only reduces your financial obligations in retirement but also offers peace of mind, knowing that you won't have a mortgage hanging over your head during your golden years. Paying off your mortgage faster can also bring a sense of accomplishment and relief. 

It reduces financial stress and can enhance your overall wellbeing, knowing that you're on a path to greater financial stability,” said Mr Grant.

While overpaying on your mortgage offers numerous advantages, the advice is to consider your individual financial circumstances, including interest rates, other debts, and long-term financial goals. Sit down before you do make any decisions and do the maths bringing in any unexpected events that might crop up.