If you make one New Year’s resolution let it be overpaying your mortgage.
This simple step could save you thousands of pounds in interest and help you clear your debt years earlier than planned.
With mortgage rates set to stay low, there has never been a better time to overpay. Even if it’s by just a few extra pounds each month, it could make a real difference.
With mortgage rates set to stay low, there has never been a better time to overpay and clear your debt years earlier than planned
With a 25-year £150,000 mortgage at a rate of 2.5 per cent your monthly repayments work out at £673.
If you overpay by just £10 a month you would save £1,140 in interest over the term of the loan and clear your mortgage six months early, according to research by Santander.
Increase your monthly overpayment to £50 and you will save £5,230 and shave two years and three months off the mortgage term. Pay an extra £100 and you will save £9,485 in interest and be mortgage-free four years and three months early.
Most banks and building societies allow you to make overpayments worth 10 per cent of your total mortgage balance each year (although check). On a £150,000 mortgage this would be £15,000 a year.
If you could afford this you would save £25,666 in interest and be mortgage free 11-and-a-half years early.
You can usually choose between making monthly overpayments or paying off some of your balance with one lump sum. Overpaying your mortgage also means you will build up equity in your home faster and qualify for better rates.
For example, with a 10 per cent deposit the average two-year fixed rate is 2.69 per cent. But with a 40 per cent deposit it is 1.89 per cent.
On a £150,000 mortgage this would reduce your monthly repayments from £687 to £628 — a £708 annual saving.
Throwing extra cash at your mortgage does mean you will not be able to put as much money into savings.
Saving: Craig and wife Karen are overpaying their mortgage
But while it is vital to have a nest egg for emergencies, reducing the cost of expensive debt should far outweigh what you would currently make on your savings.
At present there are no savings accounts that pay more than the average mortgage rate of 2.6 pc, even before tax.
Craig Buchanan, 41, is overpaying by over £50 a month in a bid to be mortgage-free by 55. The business development manager from Glasgow took out a £120,000 35-year mortgage in 2006 to buy his home.
By overpaying he has reduced the term on his mortgage by seven years. Craig, who lives with wife Karen, 41, and children Rebecca, 14, and Jacob, ten, says: ‘I took out a 35-year deal to make the monthly repayments affordable but it was never my intention to still be paying a mortgage at 64.
‘My rule is that I will always pay £550 towards my mortgage no matter what my repayments really are. So at present we currently have a 1.79 per cent deal, making our repayments £492. But instead of pocketing the cash we stick to the £550 commitment.’
David Hollingworth, of mortgage broker L&C says: ‘Those with spare money to save have been struggling to find a good return.
‘While things appear to be on the up following the launch of the Marcus account by Goldman Sachs which pays savers 1.5 per cent, it’s perhaps worth thinking about reducing debt to give a better effective return.’
However, once you have paid extra money to your lender, you cannot take it back.
So if you need access to your savings, you could consider an offset mortgage instead.
With an offset mortgage, the bank deducts the amount you have in your savings account from your outstanding mortgage balance before calculating your interest payment.
So, if you have a £150,000 mortgage and £15,000 in savings, you will only have to pay interest on £135,000.
By reducing the amount of interest you pay, you could make drastic savings over a typical 25-year mortgage — and you can still access your cash any time.
Coventry Building Society currently offers a top five-year fixed-rate offset mortgage for borrowers with a 35 per cent deposit. At 2.09 per cent the monthly payments on £150,000 are £642. The total five-year cost including a fee of £999 is £39,519.
However, this is still more expensive than the cheapest normal five-year fix from Nationwide for borrowers with a 40 per cent deposit.
At 1.89 per cent the monthly payments on £150,000 work out at £628. The total five-year cost including a fee of £999 is £38,679.
You would need approximately £15,000 of savings offset against the mortgage balance to make up for the difference in the mortgage rates.
Mr Hollingworth says: ‘If you have a big mortgage with very little savings to offset against the loan it is likely to be better to get a traditional mortgage with the lowest possible rate.’