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Mortgage Early Payment Penalties

For those who can afford to, making extra payments on a mortgage can be sensible thing to do.

Over the course of a 25 year mortgage, making just a small additional payment each month can make a huge difference to the amount of time it takes to pay it off.

For example, on a £100,000 mortgage with an interest rate of 6%, paying just £10 extra a month will knock almost a year off your mortgage. It will also save you almost £4,000 in interest payments.

However, there are some things to be aware of before making any extra payments. Probably the most important of which is to check if there are any early or pre-payment penalties on your mortgage. These can be particularly common on mortgages with fixed or capped rates. You may find that there are penalties for making any extra payments just during the period that your interest rate is fixed.

This is also something to be aware of if you are planning to move house. When you move, you are in effect paying off one mortgage and taking out another. If you have prepayment penalties on your current mortgage, you can find yourself with a nasty fee - check the details of your mortgage to see what applies to you.

Interest Calculations

Another thing to be aware of when making additional payments is how often and when interest is calculated on your mortgage. These days interest tends to be calculated much more frequently than it once was and it is fairly common to see mortgages with interest calculated daily. This means that any additional payments will have an almost immediate affect on the amount of interest accruing on your account.

However, if interest is calculated much less frequently you may benefit more by timing any additional payments to coincide with interest calculations. For example, if interest was calculated on your account just once a year, in December and you received a £1,000 bonus from work in January that you want to use to make a lump sum payment against your mortgage. If you use it in January, it won't have an effect on interest for almost a year - you may as well put it in a savings account earning interest until December - just before the interest is calculated.

This kind of scenario is much less common these days with much more frequent interest calculations. However, make sure you look over the details of your mortgage to see how to gain the most advantage from additional payments as you can.