Mortgage overpayments save thousands
One mortgage holder in five currently overpays each month, which could shave thousands off the total cost of their loan.
Santander Mortgages calculates that collectively, Brits are overpaying more than £9 billion on their mortgages each year, with the typical borrower overpaying by £181 per month.
A further 6% of those surveyed say they tend to make a one-off overpayment each year – with the average lump sum figure being £1,919 - while another 9% say they do not overpay regularly but have done so at least once in the past 12 months.
Santander says the majority (54%) have only started making overpayments in the past 12 months, in most cases to take advantage of low interest rates.
"If you overpay on your mortgage you will pay less interest over the full term, so it's a good thing to do if you can afford to," says Phil Cliff, director at Santander Mortgages.
Indeed, figures from London & Country Mortgages show the extent of the savings that could be made. On a typical mortgage of £150,000, with a duration of 25 years at a rate of 3.5% interest, monthly payments would be £750.94, says associate director David Hollingworth.
A monthly overpayment of just £50 would cut the mortgage term by two years and three months, saving a total £7,976 in interest over the period of the loan.
Double that overpayment to £100 and the mortgage term will shrink by four years and three months, saving £14,379.
And £250 of overpayment per month would erase eight years and five months from the loan, saving some £27,790.
"There is a lot of sense in overpaying now to make low rates work harder for you and drive down the capital balance. That can only help borrowers prepare for the day when rates inevitably start to climb," says Hollingworth.
However, Santander warns, it is vital that borrowers make sure their mortgage provider does not penalise for overpayments.
Hollingworth agrees, but points out that "there is often some flexibility to overpay, typically by 10% of the balance a year".
"But borrowers shouldn't throw every last penny at the mortgage either, as unless it is a very flexible mortgage or there's an offset account, it could prove harder to access the funds at a later date; they should keep a rainy day fund," he adds.
This article was written for our sister website Money Observer
This refers to the terms of your mortgage and not the interest rate you pay. Flexible mortgages offer the borrower the ability to adjust monthly payments to suit their ability to pay. Although there’s no precise definition of a flexible mortgage, it should offer: interest calculated on a daily basis; the facility to make overpayments at any time without incurring penalties; the facility to underpay; and the ability to take a payment holiday (but these may be only options if you’ve made prior overpayments). Flexible mortgages require you be disciplined in your finances and their main drawback is the flexibility comes at a price as lenders charge slightly higher rates for these types of mortgages.