the richest man in atherstone

Today, my mortgage dropped below the £60,000 mark (to £57,942.92 to be exact) thanks to an overpayment of £3000.

One of my goals for the year was to do this and I can now happily strike it off the list.

When I moved house 13 months ago, we (my wife an I) took out a £65,000 loan for the property, so to reduce the capital owed by £7000 in little over a year marks a major achievement. From the moment we moved in we decided that we would consistently overpay the mortgage each month with 30% of any extra income we earned. We'd forecast that we should be able to achieve our target by the end of the year. A recent inheritance helped us to do it six months early.

So what does reducing our loan do for us?

Well, had we simply paid the minimum payments each month the capital we'd owe at this moment in time would be around £63,800. This equates to a minimum monthly payment of around £417 (interest and repayment combined) for the remainder of the term. Due to the overpayments, the minimum monthly payment is now around £379 - that's about £38 less, which may prove very useful if we run into cashflow problems when I quit employment in the near future. Over a year that is a saving of £456.

To put it into context, if I were to put the money I have overpaid my mortgage with into a savings account instead, I would need to earn around 7.9% after tax in interest to equal the savings I made by "investing" in my mortgage.

Of course, reducing monthly payments is one just option when making mortgage overpayments. The other is reducing the term of the mortgage. If I continue paying the £413 that I was paying before, the debt would be cleared in 20 years - knocking four years off the mortgage term!

So, there's a lot to be said for overpaying your mortgage. Some people like to use their spare cash to save, whilst others prefer to pay off their debts. I am somewhere in the middle - I can see that both holding onto cash and reducing liabilities have their own merits.

I think it is important to realise that when opportunities to make worthwhile investments are scarce, reducing liabilities such as your mortgage should not be overlooked as an addition to your portfolio (even though the numbers work the other way).

Calculate the savings you could make by making overpayments to your mortgage using my handy Mortgage Calculator.