Should Borrowers Overpay Their Mortgages?

by Mark Johnston

Should Borrowers Overpay Their Mortgages?

Paying off a mortgage early is one of the best investments anyone can make.

Borrowers can therefore get rid of their biggest debt fast and they are no longer at the mercy of the see-saw property market. It also means that the money they are no longer paying on the mortgage can be put to good work.

A mortgage overpayment is simply where a home owner pays more than the specified amount per month.

It seems that a mix of record mortgage rate lows and paltry High Street savings rates means it has never made so much financial sense to use a nest-egg or unused salary to overpay on a home loan instead.

Richard Sexton, at chartered surveyors  e.surv, states “there is simply no incentive for people to tuck money away for a rainy day”.

Therefore, with many lenders touting rates of less than 3 per cent for a range of fixes and variable rate deals with a 25 per cent to 40 per cent deposit, many borrowers find monthly repayments are lower than ever before.

Andrew Montlake, director at mortgage broker Coreco, says: “We are seeing some of the lowest ever monthly mortgage payments thanks to knock down rates.

This gives many borrowers a chance to use any extra cash to overpay on their home loan and be mortgage free earlier than they would have imagined.”

Official figures have revealed that home owners are overpaying their mortgages at a record rate.

Recent research has shown that if a borrower has a £100,000 mortgage taken out over a 25 year period, with an interest rate of 6 per cent. Overpaying by £100 a month could save them a healthy £26,892.54 and knock six years and four months off the life of the mortgage.

It is worth noting though that some lenders ‘punish’ those who try to repay their mortgage quicker as it is not in their best interest to allow borrowers to do this as the longer it takes borrowers to repay their loan the more money lenders make.

Most lenders let you overpay 10 per cent of your outstanding mortgage balance a year without penalty.

However, consumers should beware as with some lenders there is a minimum amount they are allowed to overpay. If they pay in less than this, the money then sits in the lender’s coffers until the end of its financial year, which means they are giving it an interest free loan.

Alternatively,  Ray Boulger, of broker John Charcol says “those looking to remortgage who have a nest egg could take out an offset loan.”

With an offset mortgage, lenders simply subtract how much a borrower has got in savings from what they owe and then they only pay interest on the difference.

Some financial experts believe that overpaying on a mortgage is not always the best idea. Some suggest that if home owners have credit cards or home loans they should consider paying these off first as they are usually the most expensive, with higher interest rates.

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