Should you overpay your mortgage?
By Khalil Adis

I have a confession to make.

I have been overpaying my mortgage for two years now. 

I know, it’s not the norm but I sleep better now knowing I can miss a few months of payment should something unforeseen were to happen.

However, I plan to keep at it so that I can finish my mortgage earlier.

So how did it all start?

It was COVID-19 and the uncertainty surrounding it combined with my commitment to living a debt-free life that spurred me to take the plunge.

While we are still battling with COVID-19, l would say, in hindsight, it was the best decision that I had made. 

The question is should you overpay your mortgage? 

Well, it depends on your circumstances.

The advantages

From my personal experience, it is worth it.

Firstly, you will be less stressed knowing you are now several months ahead of your mortgage. 

Being able to sleep easy are just some of the intangible benefits that come with overpaying on your mortgage

Secondly, if you do not have any other debts like credit cards, car and renovation loans, you can direct more money each month towards paying the principal while lowering the amount of the interest paid over the mortgage term. 

Thirdly, from the point above, it enables you to build equity earlier in your property. 

When you save on interest by making extra payments each month, your home equity savings will start to accrue every month.

Thirdly, you can be mortgage-free much earlier than your original mortgage term.

Fourthly, with rising inflation and interest rates, you will be able to save on interest by paying more each month.

The disadvantages

However, there are also some disadvantages.

Firstly, some banks may impose a penalty for early payment of your loan during the ‘lock-in’ period. Thus, you should check with your bank if there are any penalties involved.

Here are some common examples of bank charges and fees that you may incur:

1. Pre-payment of capital sum
Buyers must give 30 days prior written notice or payment in 'interest in lieu' in the minimum of $10,000 and in multiples of $1,000.

2. Pre-payment fee
If pre-payment is made within the 'lock-in' period from the date of the first loan disbursement, a pre-payment fee of 1.5 per cent of the ledger balance will be charged.

3. Redemption
Borrowers must give 3 months' written notice or payment of 'interest in lieu’.

4. Redemption fee
1.5 per cent of the amount redeemed will be charged if made within the 'lock-in' period from the date of the first loan disbursement date.

Secondly, if you have an existing credit card debt that incurs a higher interest rate than your mortgage, then you should not do it.

Instead, you should aim to clear your credit card debt first and any other loans that have a higher interest rate.

Thirdly, you should not do it if f you do not have at least six months of savings.

This is because you may need access to extra cash on hand in case something were to happen.

Fourthly, you should not do it if you are currently not investing your money in unit trusts or any other asset class.

This is because you may miss out on good investment opportunities that pay a higher rate of return than your mortgage.

Conclusion

Whether or not you should overpay your mortgage depends on a lot of factors.

I would advise you to do a quick personal finance check and speak to your bank if there are any penalties should you wish to do it.