Did you know that reducing your mortgage debt is becoming popular again?
This is because, with interest rates falling, you can save yourself a hefty sum!
Thousands of you are making the choice to overpay your mortgages and many more will be attracted by the latest interest rate cut.
Instead of allowing your mortgage payments to reduce, you should ask your mortgage lender to keep your monthly mortgage payments at the same level. This will save you substantial sums in interest and helps you pay off your mortgage early (which is only a good thing!)
Eleanor Ross of Lloyds TSB said:
‘Clearing mortgage debt is the fashionable thing for homeowners to be doing. Many borrowers are worried about the uncertain economic backdrop and turned off by the low rates available on most savings accounts, so they are doing the sensible thing and overpaying.’
How does overpaying my mortgage benefit me?
The benefits of overpaying can be dramatic.
According to independent mortgage advisers, if you have a £150,000 repayment mortgage over 25 years with an interest rate pegged at 0.5% above the base rate, you would have been making monthly mortgage payments of just over £921 when the base rate was 5% three months ago. With the base rate now at 1.5%, your payments will be just under £636.
If you resist the urge to lower your payments, and maintain your payments at £921 and continue overpaying by £285 a month, you will save £101,194 in interest and repay your mortgage 9 years early!
What is a sensible level to overpay my mortgage by?
Even small overpayments can make a big difference to your mortgage.
For example, if you have a 25-year £150,000 repayment mortgage where your rate is 4%, you will be paying nearly £792 a month.
Overpaying by £75 a month would cut your interest by a total of £13,515 and help you repay your mortgage 3 years and 4 months early.
David Hollingworth of brokers London & Country says overpaying now makes good financial sense:
‘Not only do borrowers reduce interest costs and the term of their mortgage, but overpaying makes great sense when house prices are falling. By paying down debt, it means the size of the outstanding loan as a percentage of the home’s value does not creep up to such an extent that when they come to remortgage, they are excluded from the most attractive loan deals.’
Is overpaying for everyone?
In a word, no.
Some mortgage lenders restrict overpayments, especially for those of you with a tracker, discounted loan rate or a fixed rate mortgage. Typically, mortgage lenders will allow you to overpay up to a maximum of 10% of the outstanding loan per year. Others cap monthly overpayments at £500.
If you want to overpay, you must contact your lender, although some will get in touch with you. Lloyds TSB, for example, provides a regular extra payment request form on its website for you to fill in.
As we have said, overpaying is not for everyone. If you have more expensive debt elsewhere (such as credit cards), then it is prudent to pay this down first.
You should also be wary of making overpayments if you think you might need cash funds in the near future to make a big purchase or to help if your income is lost (say, to redundancy). Most mortgage lenders do not allow you to draw on overpayments at a later date.
It might also pay those of you non-taxpayers with mortgages to put the savings from your payment reductions into deposit accounts if the gross rate from savings exceeds the interest on your mortgage.
So it seems there is a case for overpaying your mortgage right now.
But with money being tight for most of us these days, can you afford to use your spare cash to overpay?
- Get unbiased mortgage advice
Claim back your mortgage exit fees
(Please note that articles on Money Hospital do not constitute regulated financial advice. The articles are intended to provide general personal financial information, and are based on journalistic research. We urge you to consult an Independent Financial Adviser (IFA) before making any important decisions about your finances. All rates are correct at time of printing but are subject to change without notice.)
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January 19th, 2009 at 12:53 pm
Overpaying Mortgages by Mortgage Matron recommends paying off mortgage debt, which is the conventional wisdom, in good times or bad. However, in these extraordinary times, the picture is less clear cut. Perhaps someone can throw some light on the following, which isn’t all that unusual. Let’s take the case of a homeowner with a lump sum coming in, perhaps from an inheritance or uneven earnings. If their £100K mortage is a Bank base rate tracker (at 0% above or below, for the sake of the discussion) and they have an opportunity to pay off half of their £100K, there must come a point on a monthly basis where the net interest they could get from £50K in a deposit account is higher than the interest they save by paying off half their mortgage. So they would be better off not paying off their mortgage while our national interest rates are so low.Or am I missing something ? I probably am !
January 19th, 2009 at 1:38 pm
I am in the same boat as Arthur, but I cant find anywhere that pays good enough interest on 50k, whereas mortgages all want at least 3.5% and over. So it makes sense to pay the mortgage I think!
January 19th, 2009 at 2:13 pm
I have an interest only tracker mortgage of £93000. Is there any advantage in overpaying
January 19th, 2009 at 3:56 pm
Erm, interest only so the debt never goes down??? Think if I were in that situation and I could afford it, I’d pay because in the last twenty years any equity payment schemes (pension, endowment etc) have not been able to pay off in full the amount outstanding. And also it means that the interest you pay will go down as the principle sum will be always decreasing.
January 19th, 2009 at 5:59 pm
Arthur/Joe,
Intersting points, I share your boat. I have just done the complete opposite than this article is suggesting. I have reduced my payments and extended my morgage term by 7 years.
I am in a fortunate positon because I got a tracker with no cap, 0.18% BEBR for duration, before the bite. I am currently paying 1.68% on my borrowings. I have savings account that after Mr Darling takes his cut I get a return of 4.5%Net.
As with Arthur it is simple logic that if it costs me less to borrow and I gain more on my savings then I am better off paying the minimum on my mortgage, extending the term and enjoying the interest from my savings.
As you Arthur it seems clear cut, but I would be interested in any ones views as to whether or not I am missing anything???
January 19th, 2009 at 7:25 pm
l have a tracker mortage with no coller 0.5% below base rate.My advisor tells me if l love the taxman l should overpay otherwise put it away in isa.
January 19th, 2009 at 7:33 pm
I am currently paying a tracker Buy to Let mortgage on Interest only. The two year contract on this mortgage is due to expire shortly and I will then be on a rate of BOE base plus 1.95% (3.45%). This will still leave me making a profit on current rates of approximately £200 per month which will be liable for income tax. I have built up approximately £10k fund in savings to fall back on as I work in the car trade. I would pay off £5k minimum or at least convert to a repayment mortgage but is this sensible as it will leave me liable for more income tax or should I wait until interest rates start to rise and then pay off a lump sum to minimise my outgoings. In previous years I have gone into the 40% tax band but this year who knows.
January 19th, 2009 at 10:09 pm
Like most of the posters say here, you really have to look at interest paid (or saved) versus interest available in savings.
About a year ago we came into some money through an inheritance. We paid off a large amount of our expensive credit card debt but held on to some in favour of leaving a cash cushion in our offset mortgage savings account in case of job loss. In fact given the economy and general job insecurity, building up our cash reserves is a bit of a comfort blanket.
As for the mortgage, we have an offset tracker 0.04 above BoE, interest only. We originally set ourselves a benchmark monthly figure based on the 5% interest payment. Now we pay the difference into our savings account on top of the other capital repayment options we have chosen – which offsets and is the same as overpaying except we have ready access to the funds. We then shop around to find better than 1.5% nett interest rate savings and transfer as much as we can into that.
It’s a bit of effort but worth it and a lot more satisfying than when we were juggling credit card debts.
January 20th, 2009 at 9:24 pm
I’d have thought it makes far more sense to reduce mortgage capital when rates are high. I did this in earlier times when paying off a mortgage at 6% interest seemed to make more sense than saving at 3-4%. Save the money now and pay off when rates go up.
February 5th, 2009 at 12:02 pm
If paying off a mortgage is fashionable then take care!
Fashions are neither right or wrong they are irrelevant transitory reflex actions of an ignorant herd of animals.
Do the sums then make the right choice!
February 5th, 2009 at 12:20 pm
As there seem to be a few knowledgeable people on here I wonder if you could help me.
I took out a 5 yr fixed rate at 6.29% last February, 100% mortgage. Is there any way I can benefit from these interest cuts? My exit fees are around 3k, mortgage is 112K and monthly payment over 35 yrs is £675.
Is there any chance I can find a lower rate and save even with my exit fees or do I not have a chance as it would be 100%?
February 9th, 2009 at 10:38 am
Note:- you should not overpay your morgage each month.
What you have to do to get the full benifits is to ensure that any overpayements are arranged to come of the capital each month. The building societys do not like this at all.
But with a bit of peserverance it can be arranged.