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Should you Overpay your Mortgage?

Is it a good idea to overpay your mortgage at the moment, if you can afford it? There tends to be a huge focus on people who are struggling to meet their mortgage repayments.

Many people who bought a house in the last seven years, especially those who took out a 100pc mortgage, are certainly finding it difficult.

But others are managing to repay their mortgage and have benefited hugely from the still low, but rising, level of mortgage rates.

This is especially the case with people who have tracker mortgages. Some people have tracker rates as low as 0.5pc above the European Central Bank rate, which means they have a mortgage rate of just 1.5pc.

Lenders have been examining tracker contracts to see if they can wriggle out of them.

But it is understood most lenders have recoiled from tampering with trackers as this would be seen as a step too far by a public already pushed too far by bankers.

Others still have relatively lower standard variable, despite a slew of lenders pushing up these rates in the past few weeks.

Many people with standard variable rates, and some of those with trackers, are currently overpaying their mortgage to provide themselves with a buffer to protect themselves against rising rates.

The logic here is that the homeloan is usually the biggest monthly expense in a household and paying it off seems like a life sentence for many of us.

Little wonder then that people who have a lump sum or some spare cash each month wonder if it would be worth it to use that money to take chunk out of their mortgage.

The average term of a mortgage is between 20 and 30 years. But for many people who bought in the last few years mortgage terms of between 30 and 40 years are not unusual.

And the length of time it takes to pay off a mortgage means that we end up paying through the nose for the use of the money to buy our homes.

Even with interest rates relatively low but rising at the moment, it will cost someone borrowing €250,000 over 30 years a staggering €160,000 in interest alone.

Many people are saving hard at the moment as a buffer against the recession, while others who have been made redundant and received severance pay may be considering using it to take a chunk out of their mortgage.

Paying off your mortgage is a dream for most of us, but does it make sense when mortgage interest rates are still relatively low?

No, says Frank Conway of the Irish Mortgage Corporation.

“If it were my choice, I would not overpay my mortgage right now.

“Interest rates are so ridiculously low (even still) that there is no real financial incentive to paying extra,” he added.

Mr Conway said that even paying an extra €200 per month won’t really make that much of a difference to the capital outstanding. “Cash is far too valuable to be throwing into overpayment,” he added.

Mortgage holders need to plan for higher costs in the future and so must ensure they have a rainy day fund to cover higher mortgage and other costs in the months and years ahead.

“Rainy day funds are a must have — interest rates are only going one way, up,” he added.

Justin O’Gorman of myadviser.ie said that people who are on a tracker and can afford to overpay their mortgage would be better advised to put the money into a savings fund.

“Tracker rates are not going to go up for between seven and eight months. So you should save any extra money you can in a regular savings account. “Then when rates do go up you will have got used to putting aside a higher amount,” he said.

But he understands that it is psychologically important for people to pay down debt at the moment. You can save up to €1,000 a month in the monthly saver accounts offered by EBS Building Society, Bank of Ireland or Permanent TSB.

Personal finance expert Brendan Burgess says it makes no sense to pay off your mortgage if your mortgage rate is lower than you could earn by putting your lump sum on deposit.

Even if the deposit rate and mortgage rate are close, he says it makes very little difference financially whether you put the money on deposit or pay off your mortgage.

But an important point, he adds, is that if you pay off money on your mortgage you are unlikely to be able to get it back later when you need it.

This article by Charlie Weston writing in the Irish Independent, gives good advice to those thinking of overpaying their mortgage.

Read The Full Mortgage Advice Article

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