28 November 2012
Depending on when you took out your bond and the interest rate at the time, you may have the opportunity to pay off your bond in less time than you thought. If you took out your bond between the last interest rate peak of 15% in 2008 and August 2009 then you would be enjoying the benefits of lower monthly repayments than you initially bargained for.
You are therefore left with a choice to make – either enjoy the reduced monthly outgoings and have more disposable income, or maintain your payments at their previous level and overpay your bond.
But why would you overpay?
By paying more than you need to every month means that the extra payment comes straight off your outstanding mortgage debt – which is a good thing. But what is even better is the fact that, as you have decreased the size of your debt earlier than initially planned, you have also reduced the amount of interest you will have to pay over the term of the bond. But it still gets better – every time you make an overpayment, the amount of time it will take you to pay off your mortgage and the amount of interest you pay overall is reduced!
So basically it’s a win – win situation.
But why wouldn’t you overpay then?
Simply, if cannot afford to. You may have other debt repayments to make and it is important to keep up to date with those payments at all times. The interest you are charged on other loans such as credit cards and store cards is always very high so it is logical to pay that back first. However, if you are lucky enough to have extra funds available at the end of each month, you may prefer to save that money.
So you do the math…
Calculating whether you should overpay into your bond or not on a pure financial basis is actually simple -it simply comes down to the interest rate.
Is your bond rate higher than your savings rate? If the answer is yes then overpay into your bond.
If this is not the case, then put your extra funds into a savings account.