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Should Scots be paying more towards their mortgages?
A new survey from Which?, the Consumer Association body, has found Scots are less likely to be making overpayments to their mortgages than homeowners anywhere else in the UK.
The report found that compared to a UK average of 46% of homeowners who had made overpayments in the year running up to June 2018, only 38% of Scots did so, lagging behind owners in London (60%), Northern Ireland (48%) and the North East of England (41%).
The report also found that younger homeowners, aged between 18 and 24, were more likely to be making overpayments than any other age group, with 69% of them doing so, followed closely by those aged between 25 and 34, of which 52% who had made overpayments.
What are the benefits of making overpayments?
It may seem obvious, but the benefit of making overpayments is not just that mortgages can be repaid more quickly, but thousands of pounds in interest payments can be saved over the lifetime of a mortgage.
For example, take a £120,000 mortgage that is repayable over 25 years, with a fixed interest rate of 4%. The normal contractual payments would be £633.40 per month, meaning over the lifetime of the mortgage you actually pay £70,020 in interest (in addition to the £120,000 you borrowed – total £190,020).
However, by making just an extra payment of £100 per month, the amount of interest paid over the lifetime of the mortgage is cut by £16,278 and the mortgage itself is repaid in just less than 20 years – five years early!
If you didn’t pay that extra £100 per month into your mortgage and instead invested it in a savings account, with a 2% savings rate, at the end of the 20 years you would have saved £29,300, which is still £5,093 less than what you would need at that stage to clear your mortgage.
It’s an obvious a win, win strategy.
However, another factor that needs to be taken into consideration, when deciding if you want to repay your mortgage quicker, is what happens if your circumstances unexpectedly change at a later date? It may be okay finding an extra £100 per month when you are in your early twenties, but as everyone knows, once you start a family, household expenditure can quickly increase, meaning finding an extra £100 per month, may not be as easy as it sounds.
Your circumstances can change in other ways too: you may suffer ill health or a drop in income caused by any number of other factors that may impact on your income and expenditure, some of which may be out of your control, such as the cost of living.
One of the benefits of making overpayments, however, is they are voluntary, so you can start them or stop them as you need to. Also, where you have been making overpayments and then find you are struggling, possibly even to make the monthly contractual payments, it may be possible to reschedule your payments to take into account the fact you have been making overpayments. Alternatively, you may wish to re-mortgage for a lower amount, to reduce your contractual monthly payments.
How do you make overpayments when you are struggling already?
For many, however, making overpayments is just not a realistic option, because of other financial commitments: credit card payments, bank loans, overdraft fees…there are no shortage of competing demands on household incomes.
Even if the logic behind making overpayments is accepted, making the payments themselves is just not a realistic option for many. However, it also has to be borne in mind, for most homeowners, mortgages are long term commitments, so even if you cannot overpay today, that doesn’t mean you shouldn’t be doing so in future. The UK Financial Regulator, for example, has just recently revealed that of the homeowners that took mortgages out in 2017, more than 40% will still be repaying them after they are 65.
This means, even if you cannot make overpayments today, you can still be thinking about how you can get yourself into a position to do so later.
Trimming your current household expenditure and addressing any over-indebtedness is a good way to start. You need to start thinking about how you reduced your overall level of indebtedness and reduce the amount you are paying out each month on old debt repayments.
There is also the option to adopt a five-year plan to get yourself into a position where you can afford an extra £100 per month. If you do, you will have taken the first steps to not only being mortgage free but also having the option of retiring early when you still have time to enjoy it.
If you want to speak to with a Carrington Dean Money Adviser about getting your finances sorted, call 0808 2085 195. All advice is free and confidential.