The answer here is not straightforward; there are a number of things to consider first.
Have you any more expensive debt?
If the answer here is yes, then this should be tackled first.
Credit cards and store cards, for example, charge a high rate of interest over the course of a year.
Other examples might include unsecured loans, where the interest rate is significantly higher than the cost of your mortgage borrowing.
Always pay off more expensive debts before thinking about reducing your mortgage.
Have you some savings tucked away already for a rainy day?
Ensure your pension is performing adequately and you have cash savings for a rainy day. If your pension is performing poorly or your contributions have been lower in the past, this might be a good opportunity to make a top-up contributions payment. Pensions are a tax-efficient way to save because the government tops up your contributions with tax relief. The earlier you start, the sooner your retirement pot will start to grow. So think about this before deciding to use your savings to pay down your mortgage early. Ensure you have about three months wages in savings as a rainy day fund before paying off your mortgage early
Do you have dependents?
The cost of putting in place life assurance is relatively low – if you’ve not got this already and have a family or other dependents then now’s the time to think about it.
Are there any investment opportunities open to you that could produce a higher return than the interest cost you are currently paying on your mortgage?
If you’re already contributing to a pension scheme, rather than pay off your mortgage it might make more sense to put your money into a savings account. That’s if you can find one which pays a higher rate of interest than the rate you’re being charged on your mortgage. To get an accurate comparison, work out what the rate amounts to, after you’ve paid tax (DIRT) on your savings.
What type of mortgage do you have – variable or fixed?
Check your mortgage deal to get an accurate picture of how charges can cut into any savings, which result from overpaying your mortgage. You could be charged for paying your mortgage off early or making a monthly payment, which goes over your agreed monthly limit.
The expected interest rate for the remaining period of the mortgage should be considered too.
If you do choose to invest the money don’t forget to factor in the tax leakage connected with any investment gain and ensure you research investment opportunities thoroughly. For assistance in calculating the tax cost of an investment gain, please do contact us.
Conclusion
If, after weighing up all the facts, you decide to overpay, then you need to time it right. If your mortgage interest is charged daily, then the sooner you make the overpayment the better. If it’s charged annually, then you need to time your overpayment so that it counts towards the calculation of the interest for the year. For many paying their mortgage off early brings a sense of security however professional advice should always be taken before making such a decision.