I have received some money and would like to pay off my mortgage, but my lender has too high a payment limit – is there a way to remedy this?
I recently received a generous lump sum of money and I have no idea what to do with it.
Aside from a family vacation and some very minor home improvements, I have no real use for the rest, so what's the best way to make it work for me?
I would like to pay off my mortgage as much as possible, but I can only pay too much with 10 percent.
Do I have to invest the rest of the money or is there a way to feed more in my equity?
Paying too much per month can make a big difference to the total interest
David Hollingworth, of L & C Mortgages, answers: Although savings rates have recently risen, they are still historically low.
It is of course important to have a fund with a rainy day available so that there is money that is easily accessible in case of an unforeseen circumstance, such as packing the boiler or the need for urgent repairs to a leaking roof.
As an alternative to saving, there is a strong argument to consider reducing debt when choosing a lump sum in cash.
Since debts are likely to bear a higher interest rate than is available on savings, it makes sense to check whether paying debts is a possibility to give a better return on money than to deposit it.
If paying off debts is a strategy that you want to pursue, look at your outstanding debts in order of interest rate, starting with those with the highest rates.
What about mortgage debt?
The mortgage interest rate is likely to be more competitive than that of debts, such as personal loans and credit cards, but if there are no more expensive outstanding debts, paying the mortgage elsewhere may be the place to start.
David Hollingworth, from real estate agent L&C Mortgages
Paying too much per month can make a big difference to the total interest that a mortgage pays over his life.
In this case, however, it sounds like there is a larger lump sum to play with instead of normal monthly amounts.
Before you pay too much or too little, it is very important that you understand the terms of the mortgage agreement.
If you are within a fixed, discounted or tracking frequency period, the product may bind you with changes in early repayment.
These are often calculated as a percentage of the overpaid amounts, usually around 3-5 percent, but may be higher or lower. It can therefore be substantial amounts where it is owed and can easily eliminate the benefit of overpaying.
Fortunately, most lenders recognize that borrowers want more flexibility and the majority will now allow borrowers to make a partial overpayment without incurring an early repayment contribution.
The majority of lenders typically limit overpayments to 10 percent per year
The majority of lenders typically limit overpayments to 10 percent of the outstanding mortgage balance per year, but that can vary per lender and possibly also through the deal itself, so it is important to check the details.
Some lenders offer penalty-free overpayments of up to 20 percent per year, while others can impose monthly amounts of £ 1,000 per month.
Offshore mortgages offer an alternative option whereby lump sums can be held in a separate savings account, but the interest on the mortgage becomes lower than that interest is paid.
If you limit yourself to what seems to be 10 percent of the monthly payment every month, it is probably counterproductive to exceed that limit.
Check your original offer or with your lender to get the specific details of what the charge will be and whether there is an annual fee that could offer more flexibility for a lump sum that is overpaid.
It might also be helpful to understand whether the cost of early repayment is being reduced and when, whether a limit falls within the calendar year or the anniversary of the original mortgage being taken.
Otherwise it may pay to save the funds elsewhere for now and trickle them into regular overpayments, before you make a bigger discount when your deal ends and you can review the overall mortgage.
How can compensation for my mortgage help get the most out of my money?
A compensated mortgage links your savings account to your mortgage debt and effectively enables you to pay less interest on your mortgage by waiving interest on your savings.
You keep money in your account and the balance is deducted from your outstanding mortgage balance. You do not earn any interest on the savings balance, but you only pay interest on the rest of your mortgage balance.
So, if you have a mortgage of £ 150,000 and £ 15,000 in savings, you only have to pay interest of £ 135,000, which means that you would pay considerably less interest in the long run.
You can read our mortgage compensation guide by clicking here and find our compensated mortgage calculator here.