Impact of regular overpayments on mortgage
When I purchased my house back in the summer of 2016, a colleague of mine told me to make overpayments that I was comfortable with for the duration of my mortgage as it will reduce the overall term time due to the effect of compound interest. That was the best piece of advice I ever received on this matter. As a result, I thought I would build a calculator in Excel to demonstrate the power of compound interest and making overpayments.
I have assumed a loan of £100,000, annual interest rate of 1.94%, mortgage duration 25 years. This results in monthly payments of £420.94, total payments of £126,281 and interest of £26,281. So whilst an annual interest rate of 1.94% looks low, over a mortgage lifetime of 25 years you end up paying 26.8% in interest.
The 4 scenarios I have are below and I have assumed the overpayments to occur each month without fail
From the above, we can see that making consistent overpayments reaps rewards in reducing the mortgage duration.
I am not in a position to provide any financial advice. However, I would suggest looking at your expenses and see if its possible to make savings in your expenses in the region of 3–10% of your monthly mortgage payment and use that to make the overpayment. Over time, it’ll save you much more.
If you’d like the Excel workbook I used, do get in touch.
