Should you use a lump sum to overpay your mortgage?
21 June 2024
Question by Boring Money reader
Hi,
If you are coming towards the end of a 5-year fix mortgage on a low <2% interest rate and you have a lump sum in savings/investments, should you use this to overpay your mortgage by as much as possible (without penalty) at the end of the term? For context, we are already <65% LTV and assume we’ll be moving to a new mortgage rate around 4-5%.
Thanks.
Answered by Jason Moss
Unfortunately, it’s not a straightforward yes or no.
You could compare the mortgage interest rate versus interest paid on cash held in the bank. If your mortgage interest rate is higher then this could be a driver to overpay, if affordable. On the flip side, were you able to get a greater return on cash in the bank versus the interest rate on your mortgage, then this could be a factor to consider for not overpaying for the time being.
I tend to think it is never as simple as that. If you haven’t already, then consider it in the context of your entire financial picture.
Do you have an emergency fund in place? If not, ensure you have 6 months’ general expenditure need in cash readily available for any unforeseen expenditure. This could be for a car or boiler breakdown, or to cover short-term loss of income.
What are your long-term objectives? By overpaying, would this bring you closer to achieving those objectives?
Do you have any unsecured expensive debt such as outstanding credit cards or personal loans? If so, it could be prudent to pay these off first.
It sounds like you’ve done your homework on any early repayment fees/penalties, it’s always good to understand how this might/could impact you.
Lastly, in your question it sounded like part of the lump sum could be coming from investments. If you are funding the repayment from investments, make sure you are aware of any consequences of disposing of the investments - i.e. any penalty or tax payable on any capital gains.
If you have an emergency fund in place, you have surplus cash in which you weren’t able to achieve a greater return in cash elsewhere, then you could consider overpaying.
Consider speaking to a mortgage adviser as early as possible to help you understand what your options are.
Please do not hesitate to contact me if you would like to discuss any areas further!
