Is It Time To Overpay Your Mortgage?

Paying off the mortgage early is something that most borrowers would welcome especially as the mortgage is usually the single biggest outgoing.  Recent research from the Council of Mortgage Lenders (CML) suggests that a growing number of borrowers are taking action to try and reduce their mortgage debt more rapidly.  It found that around 2.3 million borrowers have made overpayments between 2005 and 2012 amounting to an estimated total sum of £31billion.

Although the number of borrowers paying more than their required monthly payment has not substantially increased overall, it found that there are differing behaviours depending on the profile of the borrower.

Those that took their mortgage in 2008 or 2009 are significantly more likely to have overpaid and those with variable rates, such as Base rate tracker mortgages, are more likely to have made overpayments.

They are the borrowers that perhaps enjoyed some of the biggest falls in monthly payments when Bank of England Base Rate fell to its current record low of 0.50%.  By maintaining their payments at a higher level than required, they have been able to erode the capital balance of their mortgage more rapidly.  Fixed rate borrowers on the other hand saw no improvement in their monthly payments and so are far less likely to have made overpayments.

The benefits of making overpayments on a regular basis are clear to see.  For example a borrower making overpayments of £100 per month on a £150,000 repayment mortgage over 25 years at a rate of 3.50% would pay the mortgage off 4 years 3 months early and save more than £14,300 in interest over the life of the mortgage.

Of course it is important to check that there are no penalties for overpaying your mortgage although many lenders allow some level of overpaying, typically 10% per annum, without incurring any early repayment charges.  Borrowers should also retain easy access to a pot of cash to fall back on rather than pay every last penny off their mortgage.

Overpaying now with rates at such a low level will help improve the amount of equity in the property and reduce the mortgage balance, standing you in good stead for when rates do inevitably start to climb in the future.

Will overpaying on the mortgage be one of your New Year’s Resolutions?  Try our calculator to see how you could benefit from overpaying.


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