Sky high interest rates and a continually worsening housing crisis have created a mortgage monster for the average Irish homeowner. But is there a way to escape this financial beast? For those with a little extra cash to spare, the answer may be using a Mortgage overpayment calculator to reduce the interest you pay overall.
What’s Mortgage Overpayment?
Mortgage Overpayment is simply paying your mortgage quicker than your original schedule (paying off your mortgage early). This may be by paying a lump sum to the bank or shortening the time period over which you pay your mortgage. This decreases the time period you pay your mortgage over.
Mortgage overpayment requires additional payment in the short term, either through a lump sum or an increase in monthly payments. However, in the long term, your mortgage will be done quicker, knocking off years of monthly repayments in the future.
A Mortgage Overpayment Calculator will calculate the amount of money you’ll save by overpaying your mortgage, making a Mortgage Overpayment Calculator essential to save the maximum amount of money.
Put simply, the shorter your mortgage is, the less you pay overall. However, is it worth the initial investment?
Should I Overpay my Mortgage?
So should you Overpay your Mortgage? While Mortgage Overpayment can save you thousands, it is by no means a knight in shining armor. There are a few drawbacks to it, which might not make Mortgage Overpayment your golden goose.
How much can Mortgage overpayment save you? Well, there’s an easy way to find out. The Competition and Consumer Protection Commission (CCPC.ie) has a mortgage overpayment calculator on its website, this can help you determine whether paying an initially frightful lump sum or bearing the burden of increased monthly rates is worth it for future gains.
Mortgage Overpayment does not only save you money, but also improves your loan-to-value (LTV) ratio, so that if you switch the loan or move house in the future, you’ll qualify for preferred rates.
For Variable and Tracker mortgages, Mortgage overpayment is simple, just overpay as much as you wish. However for Fixed mortgages it’s a different ball game. It’s the banks decision to allow you to overpay your mortgage and the bank will often charge a fee to make up for the foregone interest payments (this varies depending on your bank, so be sure to ask the bank for your rate), but due to recent rises in interest rates, the EU has limited this charge, making now a good time for people on fixed rates to overpay.
However, Mortgage Overpayment isn’t all good news. Once you spend that extra money on Mortgage overpayment, that money is never coming back. Trying to claw back your lost money for bills or other expenses with harsh consumer loans would cost much more than a relatively low interest mortgage, resulting in a lose lose scenario in both short and long term.
If you aren’t likely to face a cash crunch though, the numbers on paying down your mortgage are compelling. This is because debt picks up interest like a snowball picks up snow rolling down a hill. If you make what you owe smaller, you make what you pay in interest exponentially smaller.
For example if you have €200,000 left on a 20 year loan at 5% and you pay off €50,000, you will save €29,195 in interest payments over the rest of your mortgage. That’s pretty good, but if you are really smart you can get a ‘triple whammy’ of savings by combining paying down your mortgage with switching. EU legislation limits lenders charging any break fees for early repayment or switching, due to recent rising interest rates.
So taking our example of a €200,000 loan.
Step 1 – Pay €50,000 off your original loan. Saves €29,195.
Step 2 – Switch your remaining €150,000 to the best long term fixed rate. Saves €20,378.
Step 3 – Finally reduce your term from 20 to 12 years by keeping your monthly repayments at the original rate. Saves €28,615.
Total saving, €78,189.
The triple whammy works because it reduces all the things that drive your interest repayments. The loan size, the rate and the term. If you are thinking about paying off your mortgage, talk to a mortgage broker who can work out the smartest switching and repayment strategy for you.
|Scenario||Current Rate||New Rate||Outstanding|
|Term||Reduced Term||Original Monthly||Old Total Repaid||New Total Repaid||Total Saving|
|Pay down €50,000||5.00%||5.00%||€200,000||€150,000||20||20||€1,320||€316,779||€237,584||€29,195|
How do I Overpay my Mortgage?
To begin, you should use a mortgage overpayment calculator to see what you stand to gain. You can use either a bank’s mortgage overpayment calculator or use the CCPC’s mortgage overpayment calculator.
You should then determine if the cash you are going to overpay your mortgage with could be used for better things (eg. rainy day fund or higher interest debts).
If you are on a fixed rate, ask your lender if they will charge you a penalty. If interest rates have risen , you should consider if you can pay these higher repayment rates and if it’s worth it to do so.
If you decide to go ahead with this decision, be completely sure you know what you’re doing and for how long you want your new term to be. If not, call a financial advisor for help.
Write to your lender outlining your intentions.
If it’s a lump sum, send the additional money to your mortgage account, which is separate from your current account.
If you are increasing your monthly rate, state how it is to be paid and for how long you want the new term to be.
For many of Ireland’s savers, Mortgage Overpayment could save you tens of thousands on your mortgage. However, you shouldn’t dive in blindfolded. A Mortgage is considered good debt, with relatively low and stable interest rates compared to consumer loans and credit cards, so for some it may be best to pay off these harsher loans or increase your rainy day fund.
Despite how lucrative it is, it’s good practice to weigh all options before diving into the pool of lower debts and increased savings. For the best way to calculate your Mortgage Overpayment, use a Mortgage Overpayment calculator.
You can get the full run down on mortgage switching solicitor and estate agent valuation costs here.