Homeowners Could Save a Significant Amount on Their Mortgages by Paying Slightly More
By paying slightly more each month, mortgage holders can pay off their homes years earlier, and also reduce the impact of rising interest rates.
Although there is currently a cost of living crisis, an increasing number of Britons are choosing to overpay on their mortgages, potentially saving themselves £18,000 in interest payments.
In the month of October, the average interest rate for a two-year fixed mortgage reached a 14-year high of 6.65%, while the rate for five-year fixed mortgages hit 6.51%.
Although interest rates have decreased since then, they are still significantly higher than the levels seen before the pandemic.
According to the Equity Release Council (ERC), homeowners made a total of £23.3 billion in mortgage overpayments during the last quarter of 2022, which averages out to a staggering £64 million per day.
By making overpayments of £100 per month, a homeowner with a four percent mortgage rate could save over £18,000 in interest throughout the duration of their loan.
If considering a £200,000, 25-year repayment mortgage, one could pay off the debt three years and four months ahead of schedule.
According to Jim Boyd, CEO of the Equity Release Council, the increasing mortgage debt situation implies that many people will have to make mortgage repayments even during their retirement years, which is not ideal as most individuals would prefer to be free of such financial obligations.
At present, the cost of living crisis has resulted in an increase of almost 20 percent in the "minimum" cost of retirement, leaving most pensioners with an average income that falls short of providing them with a moderate or even basic level of comfort.
Generally, most mortgage lenders permit homeowners to overpay up to 10 percent of their mortgage annually. However, trackers, which track the base rate, and offset mortgages, usually offer more flexibility, allowing individuals to overpay their mortgage by any amount they prefer.
According to David Hollingworth, the Associate Director at L&C Mortgages, if feasible, it is advisable for borrowers to overpay their mortgages.
His statement goes, "While dealing with the increased cost of living and interest rates, most homeowners are trying to make ends meet. However, some of them are utilizing their pandemic savings to decrease their debt."
Individuals who are currently benefiting from a low fixed rate could take advantage of the situation by saving frequently or making overpayments to reduce their mortgage balance before the end of their fixed term deal.
Prospective borrowers who are contemplating overpaying on their mortgages should take into account that certain lenders may impose overpayment penalties. Moreover, even those lenders who permit overpayments may penalize borrowers for overpaying more than the permitted amount.
The penalties for overpayment may vary between one and five percent of the overpaid amount.
Homeowners are advised by experts to evaluate whether they should give priority to paying off other types of debt with higher interest rates before focusing on their mortgage, since mortgages usually have lower interest rates than credit cards.