Mortgage overpayments | Nationwide (2024)

FAQs

Is it worth making small overpayments on mortgage? ›

By overpaying on your mortgage, you could reduce your debt and save money that way. You'd be making gains at the same rate as your mortgage. So, if your mortgage rate is 6% (after the base rate rises), for example, that's the equivalent of savings that would earn 6% in interest.

Once you've made an overpayment, you can't get a refund – and remember that you'll need to make your monthly payments as usual. Every overpayment you make means you pay less interest overall on the money you borrowed from us. Overpayments do one of two things to your mortgage balance, depending on the amount.

By making two extra mortgage payments a year, you're prepaying principal that would otherwise accrue interest over the life of the loan. Plus, those payments are accelerating repayment because they're payments you would have made anyway.

When inflation is high, paying more towards your mortgage means the higher rate of interest is applied to a smaller debt, therefore making it more affordable overall. However, if savings interest rates are also on the rise, this can create a logical argument for saving instead of overpaying.

If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.

Debt-to-income ratio targets

Meanwhile, any ratio above 43% is considered too high. The biggest piece of your DTI ratio pie is bound to be your monthly mortgage payment. The National Foundation for Credit Counseling recommends that the debt-to-income ratio of your mortgage payment be no more than 28%.

Typically you're only allowed to overpay by 10% of your outstanding mortgage balance per year, so bear this in mind in particular if you wish to make recurring overpayments more than once a year.

Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan. By paying more principal each month, you incrementally lower the principal balance and interest charged on it.

You can't prepay, renegotiate or refinance a closed mortgage before the end of the term without a prepayment charge. But, most closed mortgages have certain prepayment privileges, such as the right to prepay 10% to 20% of the original principal amount each year, without a prepayment charge.

The extra payments will allow you to pay off your remaining loan balance 3 years earlier. Because you will pay off your loan sooner, you will save $51,216.68 in interest over the life of the loan.

How to pay off a 250k mortgage in 5 years? ›

Is it better to overpay my mortgage monthly or with a lump sum? Ultimately it's down to your personal preferences. If you make smaller, monthly overpayments, it can be easier to budget for as it's predictable. It also allows more flexibility.

To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.

When you overpay on a repayment mortgage, all your overpayment goes towards reducing the capital loan of your mortgage. This is why overpaying can be so beneficial, because you can quickly start to reduce your mortgage balance.

For guaranteed savings and the security of owning your home debt free, paying off your mortgage earlier is a better option than investing your extra cash.

Making an extra mortgage payment each year could reduce the term of your loan significantly. The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you'll have paid the equivalent of an extra payment by the end of the year.

Keep in mind that this extra money is going strictly towards the principal portion, and not the interest. That means you'll be able to cut down on your principal portion without having even one single cent of it go towards interest. Shorten the time needed to end up mortgage-free.