Homeowners currently on low fixed rates may be keen to overpay their mortgages to minimise the impact of higher rates when they remortgage, but it’s worth weighing up whether saving might be a better option. Latest inflation numbers may have provided a glimmer of hope that mortgage rates won’t continue to rise as sharply as they have in recent months, but anyone due to remortgage soon is still likely to face a significant jump in costs. Making overpayments can provide a way to reduce your mortgage balance and therefore your repayments when you come to remortgage.
Benefits of overpaying
The biggest benefit of overpaying your mortgage is that you’ll reduce your balance more quickly, which in turn will shorten your mortgage term and mean you pay less interest. For example, someone with a 25-year term £150,000 fixed rate mortgage at 2.5% taken out before rates started rising, would pay £9,485 less in interest and reduce their mortgage term by four years and four months if they made £100 overpayments every month. Similarly, if they made a one-off £10,000 overpayment, they’d pay £8,133 less in interest and reduce their mortgage term by two years and three months. Most lenders will allow you to repay up to 10% of your mortgage each year without penalty, but always check the small print of your mortgage before you overpay. Making overpayments can also reduce your loan to value, which can give you access to a wider range of mortgages.
When is saving a better idea than overpaying?
A good rule of thumb to remember is that overpaying is usually a better option than saving if your mortgage rate is higher than the rate you’re earning on your savings, or is roughly the same. However, if you could earn a significantly higher amount of interest on your savings than you’re paying on your mortgage, then it might make sense to save instead of overpaying. Working out whether to overpay or save isn’t always easy, and the benefits of each will depend very much on your individual circumstances, so it’s a good idea to seek professional advice from a broker to help you decide which is the best option for you. Factors that will influence your decision include how much you’re able to overpay by, how big your mortgage balance is, and how long you mortgage term is, as well as the amount of tax you pay (if any) on your savings interest. It’s also important to consider whether you’re likely to want access to those funds in the future, as it’s very difficult to retrieve that money once it’s overpaid. If you want to use your savings in this way but still retain access then you could consider an offset mortgage. Their suitability will depend on how much you have in savings, and therefore won’t be appropriate for everyone – you can read more on ‘Offset mortgage’ page. Use our mortgage overpayment calculator to find out how both lump sum overpayments and monthly overpayments could help you save interest and reduce the term of your loan.
