One of the ideals behind Money Saving Extreme is being able to take an aspect of everyday life, more often than not the small ones and spin it around to create wealth as well as reducing unnecessary expense. Then what better incentive would one need to give up smoking than if someone were to inform you that you could possibly reduce your mortgage term by over 7 years as well as increasing your life expectancy ? This will work even if you are not a smoker yet you apply the same basic principle of the exercise.

So what's the deal ?

Mortgage overpayment, everyone is feeling the crunch at the moment in some financial way and for those of us with a mortgage the last thing on our minds is how do i pay extra. Today more than 40 per cent of a home owner's take-home pay is now being wiped out by mortgage repayments according to a Daily Mail report, The Nationwide warned that this is the highest level since the dark days of the 1991 recession when house prices fell sharply.

So how do i go about Overpayment and just what is it ?

Overpaying is simply the name given to making additional capital payments on your mortgage, over and above the required monthly payment.

For example, you could overpay by a fixed amount each month, using a standing order. Or you could pay in the entire amount of your annual bonus each year – however much it might be.
Different mortgage lenders have different policies, but most of today's mortgages allow you to overpay up to a certain level – typically a maximum amount per month or year, or a fixed percentage of the amount you owe.

This overpayment should be deducted from the capital amount (the amount you borrowed) – not from the interest you owe.The size of most mortgage loans and their standard 25 year term means that the amount of interest paid back over a 25 year period is much greater (2 to 4 times) than the amount originally borrowed.

Reducing the outstanding capital by even a small amount causes a much larger reduction in the amount of interest paid than you might expect.

Mortgage interest is calculated in one of two ways: Daily OR Annually It is very important to know which type of mortgage you have. The majority of mortgages now work on a daily interest basis, which means that the interest on the loan is recalculated every day. This means that once an overpayment has been made, the amount of interest due reduces immediately.

So whats smoking got to do with it ?

If you are a smoker ask yourself this one question,

Do i really need that cigarette ?

Every budget the chancellor always puts the price of a packet of cigarettes up so instead of lining his coffers, make it work For you and Not against you.

An average packet of 20 cigarettes costs £5.00 so based on a smoker puffing their way through 20 a day means they are literally burning a £35.00 hole in their pocket each week. Lets now take this £35.00 a week and put it towards paying the capital of your mortgage off through over payments what do we get.

Well over the lifetime of a typical £130,000 mortgage over 25 years a possible £52,000 in interest could be saved and the millstone around your neck be seriously reduced by approximately seven years and five months. On top of this your health will improve and you may just get to enjoy your house in retirement.

The following link provides an online calculator for guidance purposes to evaluate the effects of overpayment on your mortgage.

The trick is to start early but as with everything else in life there may be pitfalls !

Fees & Remortgaging -
We all know that mortgage lenders love nothing more than fees, and sadly these even apply to good borrowers who are paying back their loans early.
There are two types of fees that might apply to people who are overpaying on their mortgages:
Redemption Fee –
this is the fee you pay after you have paid off your mortgage – regardless of whether you have paid it back early. Can vary considerably in amount but is usually unavoidable.
Early Repayment Fee –
as the name suggests, this fee applies to people who have paid back their mortgage ahead of schedule. They vary widely, and may not always exist, especially if your mortgage is on a lender's standard variable rate.

If you have a fixed rate or tracker mortgage, however, you will almost certainly be eligible for early repayment fees if you finish paying back the mortgage during the fixed or tracker period.

So, if i were to ask you before this example if you could find an additional £35.00 per week to for your mortgage you probably would have laughed in my face, but if you are a smoker then you really have No Excuse not to kick the habit and by applying this basic principle you will be both financially and healthily better off for it.

Remember
Always check with your current mortgage lender the situation first with regards to your mortgage and any fees which you may incur due to overpayment.

This article was collated from sources readily available on the Internet and is offered for information purposes only and we strongly recommend you take professional advice before taking any action.

As ever, this post will be added to the MoneySavingExtreme website forum for open discussion.