Half of homeowners overpay their loans as savings rates stay low
- Making extra payments has the effect of reducing the term of the mortgage
- Borrowers need to check the rules of their deal before making overpayments
The poor rates offered on savings accounts are behind a surge in the number of mortgage borrowers paying off chunks of their home loan.
Nearly half of homeowners have been routinely making repayments on their loans larger than the amount demanded by their lender, according to research published today.
Making extra payments has the powerful effect of reducing the term of the mortgage – and shrinking the total sum of interest paid.
Borrowers need to check the rules of their loan deal before making overpayments
David Blake, of consumer group Which?, says: ‘The benefit of mortgage overpaying can be massive, sometimes cutting years off the length of a loan – and in turn, saving hundreds or even thousands of pounds in interest.’
He believes one big motive for directing cash at the mortgage is the persistently ‘unrewarding rates on savings accounts’. He says: ‘This makes it better value to pay off your mortgage instead of save.’
According to mortgage broker London & Country, someone who overpays by £50 a month on a £150,000 25-year repayment mortgage priced at 2.5 per cent would save overall £5,230 in interest and see their loan repaid two years and two months early.
A £100-a-month overpayment would save £9,485 in interest and see the mortgage repaid four years and two months early.
Borrowers need to check the rules of their loan deal before making overpayments. Some lenders limit the annual amount a customer can overpay to 10 per cent of the loan. Overstep the limit and early redemption penalties could be payable.
Blake warns borrowers to think first before they leap into topping up repayments as the money will be harder to release once it has been used to pay down the loan. He says: ‘Consider what else you could use the money for – home improvements, for example.’
Borrowers could save more money by switching to a cheaper loan. Blake says: ‘They may want to look at remortgage options to see whether they can pay a lower rate.’