by Mark Johnston
Back in march 2009 the Bank of England monetary committee voted to reduce interest rates to 0.5%. This rate has stayed at an historic low, affecting savers and borrowers alike around the United Kingdom.
Low interest rates have meant many borrowers are repaying much less in mortgage payments per month. But is this ‘spare’ cash being used to provide a financial comfort blanket in the future or wasted on unnecessary luxuries.Whatever you do with your spare income; most of us are looking for ways to save money but many of us forget about the biggest financial burden they will have in their lifetime…their mortgage.
Most people never consider changing their monthly mortgage payments and tend to assume that they are fixed. The average term for a mortgage is around 25 years although this is starting to increase as a way of spreading payments. Having a ‘set’ mortgage term is a common misconception, if you make overpayments on your mortgage you will pay it off much early, saving a potential interest payments.
Most lenders allow penalty free overpayments of some degree, mortgagerates.org.uk are even starting to see some providing no penalties what so ever no matter how much you overpay.
Paying slightly over your standard monthly repayment could save you thousands of pounds but very few people think about it. Anything that cuts the number of years that you will pay back your mortgage would decreases the overall amount you will have to pay in interest.
Overpaying also increases the amount of equity in your property and for those who are regular readers of mortgagerates.org.uk will know that the more equity you have the better the mortgage deal you can find. Many providers are offering super low interest rates for those with the largest amounts of equity as they provide much lower risk to the lenders.
Many borrowers do not have the luxury of being able to increase their monthly repayments but you still need to consider overpaying when you have a windfall or have a little extra due to a work bonus or pay increase.
Some borrowers with spare cash are apprehensive about locking their spare cash into their mortgage as they believe that once its paid that’s it. This is not always the case; Mortgagerates.org.uk reported on the increasing in lenders offering flexible mortgages where overpayments can be used to offset future underpayments when times are hard.
We need to be mindful that whilst some lenders are becoming much more flexible when it comes to mortgage payments, many will still only allow around 10% overpayment. Just remember, lenders just want you to keep making regular payments, they do not want you to pay off any borrowing early as they earn revenue from this. That’s why many lenders charge early redemption fees if you repay loans within a certain period.
For those that don’t want to tie their spare cash up in overpayments to their mortgage provider can still benefit by opting for an offset mortgage. Offset mortgages allow borrowers to pay into savings accounts and/or ISA’s etc the credit interest earned is then used to offset the debit interest charged on their mortgage, effectively overpaying without the feeling that your money is tied up.
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