Record low mortgage rates have meant that more than 19% of UK mortgage borrowers are overpaying on their mortgage every month and collectively these overpayment payments add up to more than £9 billion a year.
According to figures by Santander Mortgages, 6% overpay on their mortgage once a year and 9% overpay sporadically. A quarter of borrowers surveyed admitted that they didn’t even know that they could make overpayments.
It can be good practice to get into the habit of overpaying on your mortgage if you can afford it. Many lenders will let you overpay by as much as 10% of the mortgage value each year, penalty-free. Overpaying can mean you’ll accrue less interest on your loan over the long-term, and reduce the length of your mortgage. Essentially, overpayments mean you could pay off your mortgage early which would save you money in the long-term.
Director of Santander Mortgages said:
“If you overpay on your mortgage you will pay less in interest over the full-term, so it’s a good thing to do if you can afford to. Nearly half of those people who have never overpaid on their mortgage still put money into savings each month, and given the average interest rate on these people’s savings accounts, in the long-term they may be better off using this money to make mortgage overpayments instead.”
Savings interest rates, influenced by the low Bank of England base rate, have been at a relative low for some time.
Not only could overpaying save you cash over the year, but it could also save you money over the lifetime of the mortgage and can shorten the length of your loan. Overpaying is not for the indecisive though, as once you’ve overpaid, you can’t change your mind and get the money back. In some cases though, if you overpay regularly, you can improve your flexibility and you may be able to underpay by equivalent amounts in future months which could help if you encounter unexpected expenses.
If you have an annual interest rate mortgage and your rate is calculated on the 31st December then you could save yourself even more by repaying before the New Year. A handful of lenders work out the interest for the year ahead on the 31st December, meaning that you could save yourself hundreds of pounds by scrimping on the gifts and putting your money where your house is this winter.
Why not check with your mortgage provider or an financial adviser to see if you'd be better of holding the trimmings and saving yourself some money in the long run by overpaying now? Make sure you check all the terms and conditions of your mortgage agreement though as there might be a minimum overpayment required and you’ll need to make it clear what the money is for when you hand it over to your lender.