Rising interest rates have pushed mortgage payments to their highest levels in more than 15 years.
Many people are looking around at ways to save money. Paradoxically, one of the ways that might make it possible to do that is to pay more to your lender.
At Continuum we are looking at whether you should overpay your mortgage.
What the mortgage rate increase will cost youย
The last two years have seen turmoil in the financial markets. Since December 2021, interest rates have gone from 0.1% to 5.25%. As a result, lenders have increased the cost of borrowing, and many people coming off cheap fixed-rate deals face huge increases.
Those with large mortgage borrowing can find they have ยฃ1000 or more extra to find each month. It is difficult enough in the short term โ but over a period of 25 years or more, it means a huge extra cost, adding hundreds of thousands of pounds to the real cost of buying a home.
Making a mortgage overpayment now could make a big dent in those extra costs in the future.
What exactly is a mortgage overpayment?
A mortgage overpayment is simply paying back more than the minimum your lender requires. You can either make regular monthly payments over your normal amount or a one-off lump sum payment.
This means that the money you borrowed is being paid back quicker. Overpay by enough, and you could clear your mortgage several years faster. You become mortgage-free sooner โ and because you have cut the number of years when you are paying interest, you pay much less in overall.
The benefits donโt stop there. By overpaying you can decrease your propertyโs loan-to-value (LTV), meaning that you may be able to secure better rates when it becomes time to take on a new fixed deal.
Is it worth it for you?
Paying even more to your lender than is necessary each month can be painful. But it could be a very worthwhile.
The higher the rate, the bigger the savings with an overpayment โ so the increase in mortgage rates actually makes overpayment more worthwhile.
When mortgage rates were 2% making aย one-off overpayment of ยฃ10,000 on a mortgage debt of ยฃ250,000 over 25 years, would save ยฃ6,257 interest over the lifetime of the mortgage and reduce the term by a year and three months.
With rates at 6% the same ยฃ10,000 overpayment will save ยฃ31,723 over the lifetime of the mortgage and reduce the term by two years and one month.
Can you overpay?
As householders struggle to reduce their debts, many more people are looking at overpayments. You can either commit to overpaying by a regular monthly amount, or pay as a lump sum whenever you have some cash to spare.
If you can afford it, it might be worthwhile. But first check if your lender will let you. Lenders typically limit the amount people can overpay on fixed-rate deals to 10% a year. But this depends on the lender. Some may be much more flexible. NatWest recently moved to 20% a year for all borrowers, and Metro and Atom Bank are offering up to 20%. Others may not allow it at all, while some will make an early repayment charge.
Should you overpay?
Overpaying looks tempting, but it is not for everyone. You canโt leave yourself with no spare cash. It is vital to have enough in savings in case of an emergency. And if you have more expensive debts โ such as credit cards or loans - you should clear them first.
Remember, many banks are offering the best deals on savings accounts in years. You need to be sure you would not be better off putting any spare money aside in a savings account. Working out whatโs best for you means not only looking at whether the savings rate is more than the mortgage rate, but to factor in any tax on the interest, and looking at your personal savings allowance.
If your mortgage rate is close to, or higher than, a savings rate you can secure, then it is a good idea to overpay. Overpaying your mortgage could be better for you than paying tax on interest from savings.
Getting some help
The decision about whether to overpay can be complicated, and will have an impact on your long-term financial plans.
Getting an expert overview of those plans, and of all the implications of overpaying now is essential.
For the help you need, simply call us at Continuum.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable mortgage products, you should seek independent financial advice before embarking on any course of action.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Overpayments on your mortgage may result in an early repayment charge.
