Tuesday 18 December 2018

Shave tens of thousands off your home loan - by overpaying what you owe


Be careful about overpaying a fixed rate mortgage
Be careful about overpaying a fixed rate mortgage
Louise McBride

Louise McBride

Higher mortgage bills are on the way - if, as expected, European interest rates start to tick upwards next year.

Now is therefore the time for homeowners to do what they can to make their mortgage cheaper. With the number of people at work set to reach an all-time high this year, the recession is a distant memory for many - and homeowners who are more comfortable than they have been in a long time should give serious consideration to overpaying their mortgage.

You could knock tens of thousands of euro (or more) off your mortgage, and become mortgage-free much earlier than originally expected, by overpaying it.

You can overpay your mortgage by paying a lump sum off it (known as a lump sum overpayment) or by increasing the size of your monthly repayments (known as regular overpayments). You would save €12,826 in mortgage interest - and pay your mortgage off almost three years earlier - by overpaying your mortgage by €100 a month, according to the mortgage brokers, Dowling Financial. This is based on a 25-year variable mortgage of €250,000 - where the interest rate is 3pc. Should you overpay the same mortgage by €50 a month, you would save almost €7,000 in mortgage interest and clear your mortgage 17 months earlier, according to Dowling Financial.

Should you opt for regular overpayments, be mindful that if interest rates creep up next year, so too will your monthly mortgage repayments. So be realistic about any overpayment you take on. Should you find that you can no longer afford regular overpayments at any stage, you can stop the overpayments - once you give your bank a certain amount of notice. It's important not to overstretch yourself with your mortgage so should you not be in a position to overpay it, remember you could still save a lot of money by simply switching to a cheaper interest rate.

Fixed Mortgages

Be careful about overpaying a fixed rate mortgage - as you may be hit with an early redemption fee (also known as a break fee) if you do so. Break fees can be large and will eat into any savings you would make when overpaying your mortgage.

With Bank of Ireland, KBC Bank and Ulster Bank, you can avoid the early redemption fee if you make an overpayment off a fixed mortgage - as long as you stick to certain limits. With Ulster Bank, you can make overpayments of up to 10pc of your "outstanding fixed rate balance each year" without incurring a break fee. KBC also allows you to make overpayments of up to 10pc of your mortgage balance without incurring a fee.

With Bank of Ireland, regular overpayments of up to 10pc of the normal monthly repayment (or up to €65, whichever is greater) can be made without triggering a break fee. Should you make a lump sum overpayment off a Bank of Ireland fixed mortgage however, you may be hit with an early redemption fee. With Permanent TSB, you can avoid break fees when overpaying a fixed rate mortgage - however, the overpayment is only applied as a credit on the account and doesn't come off the capital. A spokesman for the bank said the customer would still get "the interest rate benefit [as a result of the overpayment] in the background".

You cannot avoid break fees with AIB or EBS by keeping your overpayment within a certain limit - so it is very likely you will be hit with such a fee if you overpay a fixed mortgage with either of these lenders. It won't make financial sense to overpay a fixed mortgage if much of the savings are gobbled up by a break fee.

"However, if you're on a fixed rate mortgage and you want to overpay your mortgage, but you can't avoid a break fee, save the extra money every month for a number of years - and at the end of the fixed rate term, use the savings to make a payment off your mortgage," said Michael Dowling, managing director of Dowling Financial.

Get the full benefit

Be sure to get the full benefit of lower interest if overpaying your mortgage. You may need to instruct your bank to make some changes to your mortgage so that this happens and even if you don't need to do so, get your bank to clarify that the overpayment has been taken off your mortgage and that you are getting the benefit of lower interest right away. "Make sure your mortgage is reflecting less interest - because of the overpayments," said Dowling. "Don't just pay a higher amount off your mortgage and leave it sitting as a credit on your account - as that credit is unlikely to come off your capital or reduce your mortgage interest unless you tell your bank to take the credit off your outstanding balance - and to adjust the term of your mortgage so that it reflects the higher repayments."

With Permanent TSB, you have three choices when making a lump sum overpayment: the overpayment can be used to reduce your monthly repayments over the same mortgage term that you originally signed up to; to reduce your original mortgage term while keeping your monthly repayments the same; or to leave a credit on your account for a future payment holiday (where you don't pay your mortgage for a few months). Should your priority be to slash the cost of your mortgage, the best choice in this instance is to keep your monthly mortgage repayments the same as they were before the overpayment and to use the lump sum overpayment to reduce your original mortgage term.

When you make a lump sum overpayment with AIB, your mortgage repayments will be automatically reduced and the interest rate and term of your original mortgage will remain the same - unless you tell the bank to use your overpayment to reduce the term of your loan and to keep your mortgage repayments the same as they were prior to the overpayment.

Clear it in one go

Being mortgage-free well ahead of retirement is something most of us only dream of - but if you get the chance to clear your mortgage a lot sooner than originally planned, you'll save tens of thousands of euro (or more) in interest and have much greater financial freedom. For example, if you have €150,000 left to repay on a Bank of Ireland variable mortgage over the next 10 years, and you clear that mortgage today, you'll save about €35,000 in mortgage interest - assuming the interest rate on your mortgage is 4.5pc.

So should you come into a large lump sum after inheriting something or selling property for example, using that lump sum to clear your mortgage in one go is certainly worth considering. Before doing so however, look at other debts you may have. Should you have more expensive debt than your mortgage (such as credit cards, overdrafts or expensive personal loans), clear these first and use whatever is left over to repay as much of your mortgage as you can.

Bear in mind that the interest charged on mortgages is often cheaper than that charged on other loans. So if you plan to borrow money in the coming years (such as for building an extension), it may be worth setting aside some of your lump sum to fund such plans - rather than using the entire lump sum to clear your mortgage and then having to borrow money for those plans in the future at higher interest rates than your mortgage. As always with borrowings, careful planning can save a lot of money.

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