A mortgage is by far the largest debt that most people take on during their lifetimes. Ironically, many people do not consider a mortgage to be debt so they do not hurry to repay it. Making extra payments on a flexible mortgage can save a huge amount of money. Interest is constantly accumulating so any effort to reduce or eliminate the balance more quickly is smart from a financial perspective.
The interest rate on a mortgage is usually higher than the interest earned by a savings account. Therefore, repaying the mortgage saves interest. Extra payments are applied toward the principal portion of the mortgage, lowering the capital balance rather than paying interest. When the mortgage is repaid, the extra money can be saved or invested so it will grow over the years.
These days, the stock market is very volatile, making investing in it quite a gamble. Many investors are finding themselves with less money than when they started. Extra payments on a mortgage are guaranteed money savers. It is smarter to pay down the mortgage loan before speculating on the stock market and risking losing all that money. Playing the market could quickly wipe out the extra funds available to reduce the huge home loan.
Paying extra money toward a mortgage involves making extra monthly payments or making one-off lump sum payments. When determining how much extra to pay each month, calculate how much will be saved by making these extra payments. For example, with a 30-year, £100,000 mortgage with an interest rate of seven percent, the regular monthly payment will be £665. Overpaying £50 each month will save £31,193 and reduce the mortgage term to 24.2 years. Making an extra payment of £150 monthly will save £63,317 and reduce the term to 18 years.[doyouneed01]
Making extra lump sum payments is another way to reduce mortgage capital. In addition to reducing the total cost of repaying the mortgage, this approach shortens the mortgage term. As an example, consider a £150,000 mortgage with a 25-year term and an interest rate of eight percent. The monthly payment amount is £1,157.72, for a total mortgage cost of £347,317. Making a £2,500 lump sum deposit saves £13,721 and reduces the mortgage term to 23.8 years.
The benefits of making lump sum payments are greatest when interest rates are high or the mortgage term is long. When you take either the lump sum or extra monthly payments approach, you will also own a greater percentage of the home, which makes it easier for you to remortgage. Getting a new mortgage with a lower interest rate can save even more money.
If you have the funds to pay extra money toward the mortgage, do it. Savings are probably not earning as much interest as the rate you are paying for the mortgage. Investing is currently a very risky approach to earning money. Take the cash and use it to pay down the mortgage balance and you can save tens of thousands of pounds and substantially shorten your mortgage term.
