Brokers - let's talk about overpayments

A feature like charge-free overpayments is useful and for many customers even a 10% allocation is significant when you are looking at disposable income after tax. I rarely see clients who have used even their 10% overpayment at mortgage review time. However, I am sure that this key feature will be valuable to some borrowers.

This is good news from NatWest and they join a very select few lenders with a standard overpayment policy of over 10%, meaning for clients looking to overpay substantial amounts it will put them in the running whereas previously they would not have been. That being said, currently, overpayments are not something I'm speaking to many clients about, or certainly not at a scale that would require a 20% upper limit. Markets move in cycles however, so there will come a time when more people can take advantage of this feature and that will give NatWest an edge over its competitors.

We find most of our self-employed applicants want the ability to overpay as their business profitability grows. So a 20% annual overpayment allowance will be very attractive.

With many borrowers on 30 plus year terms, the potential to reduce interestpayments and become mortgage free even earlier is a great point of difference in an incredibly competitive mortgage market.

I'm a raving fan when it comes to overpayments and I practice what I preach so being a Natwest customer myself this is music to my ears. Overpaying your mortgage when times are good means you clear your mortgage sooner, saving interest not just now but in the future too and meaning you could be mortgage free much sooner. In my own situation my mortgage is on track to be cleared 14 years sooner than planned just by adding a manageable extra amount onto my direct debit each month.

Not all borrowers have the ability to overpay a substantial chunk of their mortgage, so the benefit of having a higher upper limit will only benefit a minority. This will benefit self-employed borrowers who anticipate their business's profitability to increase and those who receive substantial bonuses. Overpayments tend not to be a major conversation as most lenders allow you to pay 10% as standard without incurring a penalty.

Discussing early repayment charges with clients and any overpayment facility available is important. Some lenders have been offering a larger overpayment facility for a while, and some – more common with variable rates – have no early repayment charges. From our discussion with clients, a 10% overpayment facility on fixed-rate mortgages has generally been adequate, although everyone is different.

However, as interest rates have risen, I expect more people may find increased value in overpayments.

For higher loan amounts, increased rates will have a larger impact in terms of interest payable, potentially making it more appealing to reduce their debt faster. For lower loan amounts, the typical 10% overpayment facility equates to a relatively lower monetary amount, which may make an increased overpayment facility more valuable.

With the new lender ICR stress tests in effect, it is becoming more difficult for landlords to pass lender checks if the rent on their portfolio is insufficient. Discussions around increasing rents seem to be the common talking point, but overpayments to bring the mortgage balance down are a great way to maintain a healthy portfolio should they be looking at remortgages or property purchases in future.

Discussions around overpayments are more common now than ever before and are worthwhile for those who are in the fortunate position that they can afford to do so.

Whilst the ability to overpay is far down on the list of priorities for most clients in terms of suitability of a lender, it is important to understand clients' intentions with the mortgage as products with lower or even no exit fees are available for consideration.