For most people, repayments on a mortgage is the single biggest financial outlay each month. But could homeowners be missing a trick when it comes to overpaying on their mortgage?
According to research by comparison website comparethemarket.com, UK mortgage holders are unnecessarily spending thousands of pounds on their mortgage through one small oversight: not making small but regular overpayments to their provider.
By doing so, homeowners could cash in on significant savings and cut down their mortgage term at the same time – although the amount you can save by overpaying differs by demographic and the type of mortgage you are on.
What did the research reveal?
The analysis by comparethemarket.com found that UK homeowners on a fixed-rate repayment mortgage could save £5,895 and reduce their term by three years and two months by overpaying an extra £100 a month, while first-time buyers on a fixed-rate could enjoy potential savings that are even greater.
Via regular overpayments of £100 every month, this demographic could cut their mortgage term by two years and seven months and save £6,129 in interest.
Those on a standard variable rate mortgage (SVR), meanwhile, will see higher savings by overpaying on their mortgage because they are likely to be on a more expensive interest rate in the first place. These households could save more than £13,000 on interest and knock three years and four months off their mortgage term by making regular overpayments.
Mortgage holders on SVRs are likely to be paying over the odds because of higher interest rates, with this group instead advised to switch to a fixed-rate deal and use the extra money from being on a cheaper product to make regular overpayments.
Small sacrifices for long-term rewards
Those mortgage holders who do currently overpay are prepared to sacrifice day-to-day luxuries in order to afford the extra cost overpayments require.
A fifth (19%) said they had not taken a holiday abroad, while 12% delayed buying a new car and 21% put off purchasing luxury items such as expensive clothes or gadgets like an iPad.
These financial sacrifices, however, are only a small price to pay as the majority (56%) of those who have overpaid are happy with the security this provides. They admit that contributing a little bit more towards their mortgage each month makes them feel more financially secure in the long run.
Despite this, the majority of mortgage holders (56%) still hesitate to put aside additional money towards their mortgage every year. This is a question of cost for many, with over half (55%) saying that they cannot afford to make the extra payments, while a third say that they have too many other outgoings, such as credit card debt and utility bills.
Although early repayment fees are standard across the mortgage industry, 54% of respondents say that these charges discourage them from making overpayments.
“Even though committing more of your pay cheque towards your mortgage can seem financially daunting, even modest but regular overpayments can save you thousands in the long run,” Mark Gordon, director of mortgages at comparethemarket.com, said.
“Households on standard variable rates are likely to be paying higher interest rates and have more expensive monthly mortgage commitments. If you are on an SVR, instead of overpaying on your mortgage it may be wise to switch to a fixed-rate product which is always cheaper. You can then use that extra money to make overpayments and reduce your term even further to avoid paying unnecessary sums in interest.”
Mortgages in numbers
According to the FCA’s mortgage lending statistics, the outstanding value of all residential mortgage loans was £1,451 billion in the first quarter of this year, while advice website Finder puts the number of UK mortgages in the UK at 11.1 million.
With this data in mind, comparethemarket.com puts the average mortgage debt at £130,720 per household.
Meanwhile, according to data from Moneyfacts, the average fixed-rate is currently 2.49%, while for SVRs it stands at 4.89%.
Early repayment charges (also known as ERCs) vary from lender to lender and product to product, but are typically between 1% and 5% of the mortgage – although these will sometimes reduce over time.
SVR mortgages don’t typically have early repayment charges, but fixed-rate and variable rate mortgages do. You can find out more about early repayment charges here.
It’s best to check with your lender if there are any early repayment charges on your mortgage if you overpay, as these additional fees could wipe out the benefit of the extra mortgage overpayments.
If you want to find out how much you could be saving by overpaying each month, L&C’s mortgage overpayment calculator shows you how both lump sum overpayments and monthly overpayments could help save you interest and reduce the term of your loan.
Here at Key Property Consultants, we can assist you with all aspects of the selling, buying and moving process, largely covering South London, Croydon and parts of Kent.
To find out more about the services we provide, please contact us on 0203 739 2033. For those looking to calculate their monthly mortgage repayments, our mortgage calculator will give you an estimate of what your monthly payments would be for a particular loan amount, interest rate and mortgage type.
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