Recent collapse in interest rates has given mortgage borrowers a once-in-a-lifetime opportunity to take charge of their debt.
Too many people are heading into retirement with uncleared mortgages and other debts that can be impossible to clear once you have stopped working.
By making overpayments today you can clear your mortgage years earlier and save a small fortune in interest. This will also help you to safeguard your finances and put you in a better position for when interest rates do finally rise.
Pay it down
Mortgage costs have plunged over the past five years and should fall even further from September 1, as most major mortgage lenders have indicated they will pass on the Bank of England’s recent 0.25 per cent cut from that date.
Borrowers on variable or tracker rate mortgages should reap the benefit, but rather than blowing this saving, they should put the money to work. Mortgage holders could save more than £1,800 in interest by making regular overpayments, according to research from CompareTheMarket.com.
Somebody with the average mortgage, which is currently £94,686 with 14 years left on the term, could make big savings simply by overpaying by 10 per cent each month. This would cost them an extra £59, but save £1,842 in interest repayments, and will also cut their mortgage term by one year and four months. Larger overpayments will generate even more savings.
Younger borrowers with larger mortgages spread over longer terms can make even greater savings. The average 25-34 year old has borrowed £142,582 and a 10 per cent monthly overpayment would cost £68 but save £6,553 in interest and reduce their 23-year term by two years and eight months.
Put savings to work
Roughly one in five borrowers attempts to overpay their mortgage, in some cases making sacrifices such as foregoing a holiday abroad or delaying buying a new car.
However, almost six out of 10 are missing an opportunity by never overpaying.
CompareTheMarket’s head of money Jody Baker says: “Whilst committing more towards your mortgage can seem financially daunting, small regular monthly contributions or even a one-off lump sum overpayment could save you thousands in the long term. The collapse in savings rates has made overpaying even more attractive, so this can be seen as a savvy alternative to traditional saving and could prove a huge benefit to homeowners in the long term.”
Check the terms of your mortgage because some lenders restrict overpayments to 10 per cent of your outstanding amount each year.
Baker warns: “If your bank imposes significant penalties for overpaying ask if you can reduce the term of your mortgage instead.”
This will increase the monthly payments so in effect you are permanently overpaying, although some lenders may charge an administration fee for altering your term.
Target your debts
You should also look to see if you can get a cheaper mortgage deal either from your existing lender or a rival bank or building society. If you get a better rate, but maintain the same monthly mortgage repayment or cut your term, you will clear your debt even faster.
Adrian Anderson, director of mortgage broker Anderson Harris, says there are some outstanding mortgage deals at the moment: “Barclays offers a two-year tracker charging 1.24 per cent available up to 60 per cent loan to value with a £999 fee and free valuation for those remortgaging.”
Shopping around for a better deal like this is also a great way to reduce your mortgage burden and free up extra cash.
Candid Financial Advice founder Justin Modray says: “If you have more expensive debts, such as credit cards or an overdraft, you should focus on paying these down ahead of your mortgage. These can charge rates of almost 20 per cent despite the near-zero base rate, making them a much greater burden.”
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