We’re now in the last few months of 2019, and savers are still suffering with interest that is constantly lagging behind inflation. Meanwhile many borrowers are taking advantage of cheaper rates on mortgage deals.
As savings rates continue to fall, you may be wondering whether you'd be better off paying more into your mortgage instead. Overpay your mortgage can potentially reduce your term by months or even years. Plus, you can end up saving yourself thousands of pounds in interest payments alone.
What if you have a lump sum?
If you suddenly come into a lump sum of money, you may be unsure whether to save it, or use it to overpay your mortgage. The top savings accounts currently available only offer savings rates of around 2%. So if you saved a lump sum of £2,500, you’d only earn an extra £52 in interest over a 12 month period. It’s perfectly possible to earn more through savings but you would need to lock your money away for longer.
You could use the lump sum to overpay your mortgage, as doing so could reduce the overall term of your mortgage deal and save you from spending thousands more in interest. For example, if you took out a £200,000 25-year mortgage with an interest rate of 2.45% (the current average two-year fixed-rate), you could potentially make the following savings:
| Overpayment | Approx. savings on interest | Months cut from mortgage term |
| £2,500 | £2,083 | 5 |
| £5,000 | £4,119 | 10 |
What about monthly payments?
Not everyone has a lump sum to put down in one go, so another option it to overpay or save more on a monthly basis. An instant-access savings account can be ideal if you want the option of saving different amounts of money each month.
The advantage is you can take your money out and switch to a better deal whenever you want to. However, interest rates for these types of accounts are usually low. Plus, whatever savings rate you do get could always change after the first 12 months. For example, if you were to pay £250 a month into a savings account that has an ongoing rate of 1.45%, which is on the higher end, you would only make £20 in interest in the first year.
Alternatively you could choose to overpay your mortgage on a monthly basis, but the benefits of this would depend on how long you kept up these extra payments for. For example, if you took out a £200,000 loan, over a 25 year period and made overpayments of £250 every month for 3 years - you could cut close to £10,000 off the overall balance.
Should you be overpaying?
During this time of lower mortgage rates and cheaper deals, it does make sense to make overpayments in order to try and reduce your mortgage term. However, it’s worth considering that if you do put extra cash into your mortgage, you’ll struggle to get it back easily.
Although a large percentage of mortgages allow for overpayments, there are some that don’t. Certain lenders will also set lower limits on how much you can actually overpay by. This is why is can be helpful to seek advice from experienced and professional mortgage advisers, who can talk through your circumstances and requirements to recommend the best options for you.
Keep in mind that even though there are many mortgage deals that allow overpayments, not everyone can afford to do so, which is why some simply choose to put their money elsewhere. Some opt to pay more on an irregular basis, whenever they have extra cash to spare. If this sounds like you, then it’s hugely important that you don’t leave yourself without an emergency fund, as your circumstances could change suddenly.
If you have other debts, such as credit card bills or a personal loan, then you’ll likely be better of prioritising paying these off. This is because the interest they would charge would generally cost you more than what you would save overpaying your mortgage, or what you’d earn from a savings account.
What can you do instead of overpaying?
One thing to consider is remortgaging to a better deal. There’s a wide variety of cheaper deals available on the market, but keep in mind that you’ll need to wait until the end of your introductory rate period or fixed term before you can remortgage. Many mortgage deals will come with high early repayment charges if you leave before this time is up.
If you have the funds available to overpay your mortgage in the meantime, this could increase your chances of switching to a better deal when you decide to remortgage, as you’ll be borrowing lower proportions of the property’s value.
Another option is to ask your provider to reduce the terms of your mortgage, which will increase your monthly repayments. However, both you and your lender will need to be certain that you can really afford to do this.
At TaylorMade, we believe the mortgage process should be as clear and as transparent as possible, everything from mortgage rates and your options for overpayments, to getting a remortgage should be clear and simple. We strive to ensure you’re treated fairly by lenders, and that you’re given the tools and information you need to make the most informed financial decisions.
Our friendly team can talk and guide you through all of your options - please get in touch with us today.
