Overpay your mortgage and save thousands
Paying more to your mortgage lender can mean great savings, but you will lose access to your money.
According to the Council of Mortgage Lenders (CML), an estimated third of all borrowers have overpaid their mortgage in the last seven years.
These people have willingly paid their mortgage lenders more than they owe them, either on a regular basis or by making occasional lump sum overpayments. But why have they done this, what sort of borrowers are choosing to pay more than they need to, and is it a good idea?
Overpaying sounds strange but it actually makes sound financial sense. By paying your lender more than necessary you reduce your overall mortgage debt more quickly, and because you are charged interest on that debt, the interest you owe also reduces.
Over the long term this can have a dramatic effect on your finances, potentially saving you thousands of pounds and cutting the term of your mortgage by years.
It can also help you build up an equity buffer in your home, which could prove invaluable should you want to remortgage in the future. Lenders offer their best deals to those with the greatest equity, so overpaying can give you future access to cheaper mortgage rates.
Easier than ever?
Current low interest rates mean that more borrowers than ever are able to overpay, without feeling the financial pinch.
In 2007 the base rate stood at a whopping 5.75% and the average rate on outstanding variable rate mortgage was 6.42%.
Now the base rate has been at its all-time low of 0.5% for over three and a half years, and mortgage rates are extremely competitive (particularly for those with a lot of equity).
This gives borrowers greater potential to overpay their mortgage because, for many, their interest rate and monthly repayments have plunged in recent years. Rates have fallen massively, so by simply maintaining their previous payment many borrowers are quite easily able to overpay.
According to the CML some 2.3 million borrowers have paid off more than they need to since 2005, which is around 34% of all mortgages taken out in that period. And the amount overpaid is a massive £31 billion!
The trade body found that borrowers who took out mortgages in 2008 have been particularly significant overpayers. The reasons for this are clear. A third of lending in 2008 was tracker mortgages and at the time they were priced at a very narrow margin to base rate (less than one percentage point above base rate).
Many of these 2008 borrowers have therefore seen a truly massive fall in their monthly mortgage commitment, making it very easy for them to overpay now.
Borrowers with offset mortgages are, unsurprisingly, significantly more likely to have overpaid. The ability to pay off the mortgage faster is a key selling point of offset products, so it stands to reason that borrowers would use them for this purpose.
Is it a good idea?
Overpaying is an excellent idea for many borrowers. It helps you to build equity in your home, which means that better deals will become available to you when you remortgage. And it saves you money, because by owing your lender less money, you are charged less interest. The cumulative savings are not to be sniffed at.
However, there is one big issue with overpaying. It can mean you lose access to that money, which isn’t very helpful if you need it in the future.
Putting your extra money into an easy access savings account or ISA may not be too appealing with interest rates currently so low, but at least your cash is there should you ever need it. Whether you lose your job, your cars packs in or you are faced with an unexpected expense, having money you can get your hands on quickly is invaluable.
Of course some mortgage lenders will allow you borrow back your overpayments, or underpay in the future, providing you have built up an overpayment buffer. But it’s essential that you double check your future access to money you overpay – even with a fully flexible mortgage.
There have been recent reports of lenders refusing to allow borrowers to borrow back their overpayments, even where this was a feature of the mortgage.
Suggestions that some lenders are keeping hold of overpayments, even if the borrower is on schedule to repay the loan on time, are clearly concerning for borrowers who have already overpaid significantly, especially if you don’t have sufficient funds in a separate savings account.
Of course, each lender is different so make sure you check your lender’s policy on borrowing back overpayments or making underpayments in the future.
Money you overpay could be gone, or at least tied up in your property, until you come to sell. It might be working hard for you in your mortgage account, but that won’t be much good if you need it now. Only overpay what you can afford to be without.
At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email email@example.com for more help.
This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.
Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.