Over half of homeowners (56%) never overpay on their mortgage, even though doing so could potentially save them thousands in interest and reduce their mortgage term.
According to research by comparison site comparethemarket.com, a homeowner with an average £130,720 mortgage paying a rate of 2.49% over a 20 year term could save themselves £5,895 in interest if they overpaid by £100 each month. They would also reduce their mortgage term by three years and two months, enabling them to be mortgage-free in less than 17 years.
Homeowners on more expensive standard variable rate mortgage (SVRs) will see even bigger savings by overpaying. These households can save over £13,000 in interest on average and knock three years and four months off their mortgage term by making the same £100 monthly regular overpayments. This calculation assumes they have the same £130,720 mortgage but are paying an average standard variable rate of 4.89%.
Mark Gordon, director of mortgages at comparethemarket.com, said: “If you are on an SVR, instead of overpaying on your mortgage it may be wise to switch to a fixed rate product which is always cheaper. You can then use that extra money to make overpayments and reduce your term even further to avoid paying unnecessary sums in interest.”
Why overpaying makes sense
Overpaying your mortgage even by small amounts helps to reduce the amount you owe and can allow you to clear your debt more quickly. It can also help to mitigate the negative impact of low savings rates.
For example, if your mortgage rate is higher than the amount of interest you can earn on your savings (which could be taxable), then overpaying your mortgage makes sound financial sense.
Mortgage holders who do overpay are willing to give up day-to-day luxuries in order to afford the extra cost, according to the comparethemarket research. One in five (19%) said they hadn’t taken a holiday abroad so they could overpay their mortgage, whilst more than one in ten (12%) delayed buying a new car in favour of overpaying. More than half (56%) of those who have overpaid said that overpaying their mortgage makes them feel more financially secure in the long run.
How much could YOU save?
The actual amount you can save by overpaying your mortgage will depend on how much you’ve borrowed, your mortgage rate and term, and how much you plan to overpay by.
Crunching these numbers isn’t easy, so we’ve come up with a handy overpayment calculator to do the sums on your behalf. All you need to do is put in some basic information about your mortgage as well as some details about the mortgage overpayment you’re planning to make and the calculator will do the rest.
Before overpaying, make sure you check with your lender that you can do this without penalty. Most lenders will typically allow you to pay off 10% of your mortgage balance each year if you’re in a fixed, discounted or tracker period.
Homeowners could save thousands by overpaying