Making overpayments on your mortgage may be one of the best financial decisions you make. You don’t need a lump sum – many mortgages allow you to pay off a bit extra each month.
Find out first if there is a minimum amount, a best time to make an extra payment, or whether there are any penalties for repaying all or part of your mortgage early. Most mortgage providers apply an early repayment charge if you decide to end your deal while you're within the deal period or overpay more than 10% of an outstanding mortgage balance in a year. Details of any specific Early Repayment Charge, specific to your mortgage, will be explained on your Mortgage Offer Document.
If you have an interest-only mortgage, check that extra payments will reduce what you owe – not just the interest. If you are able to afford to pay more, consider switching to a repayment mortgage, as the amount you owe will become smaller each month.
If you have savings and you’re earning less after tax than the mortgage rate, it may be worth using your cash to pay off some of your home loan. Although once you’ve paid off your mortgage, you can’t use it for anything else. If you think you may need this money later, consider an offset flexible mortgage. This lets you use your savings and the balance in your current account to reduce your mortgage interest – but you still have access to your cash if you need it. The added advantage is that as you’re saving rather than earning interest, it should be tax free; and more of your monthly repayments could go towards paying off your mortgage more quickly.
However, if you have other borrowings, it may be worth repaying those first as you might be paying more interest on loans and credit cards than on your mortgage.