Copy article

Should households on low rates start overpaying their mortgage?

Journalist: Imogen Tew, Freelance

ended 13. November 2023

Hi all - I'm writing a piece up today for a national newspaper. I have a case study of someone who is doubling their mortgage payment (from £1,000 to £2,000 a month) to chip away at their loan in anticipation of being moved onto a higher rate in the future.

Stats show that around 50% of mortgage holders are still on the historically low rates of 2021 and before. If you can afford to do so, should you overpay now while your rate is low? Could this help you when it comes to remortgaging, as well as the fact that you would be used to paying a higher amount? What else do mortgage holders need to think about?

Are there any mortgage brokers that have recommended this to their clients? Do you have any anecdotes - the more detail the better - that you can share?

Thank you in advance!

15 responses from the Newspage community

Copy all

Copy

Editor
Stephen PerkinsVerified
Managing Director at Yellow Brick Mortgages
Certainly if anyone is on a low mortgage rate and had the ability to overpay then this will be beneficial when it comes time to remortgage with a lower balance going onto the higher rate, potentially being in a lower loan to value bracket and getting used to making higher payments. However with savings rates of over 5% available it may be beneficial to put that extra money away earning higher interest than the interest cost of the current mortgage and then pay down the mortgage at the time of remortgage. Borrowers need to also consider overpayment limits usually 10% of the balance per year to avoid incurring early repayment charges. Sadly borrowers in a position to significantly overpay their mortgage are in the minority.
Copy

Editor
Darryl DhofferVerified
Founder at The Mortgage Geezer
Let's look at an example - an average mortgage is £184,000 with an overall term of 25 years - taken in 2021 this would have been a rate of approximately 1.99% paying £779/m - balance left after 2 years would be £172,407. Fast forward to 2023, the new rate now averages 5%, and payments are £1,052/m - This is a 35% increase in payments - Assuming you made 35% overpayments on the original mortgage at 1.99% which is £273/m, the consumer would have reduced mortgage down to £165,855 - and NEW payments in 2023 would be £1,012/m - so effectively saving £40/m - not much reduction sadly, so overpayments in 2 years wouldn't cause much of an effect. I am advising clients to make overpayments on any unsecured debts like credit cards and loans, if they have disposable income, and make adjustments to current living costs, in readiness for higher interest rates.
Copy

Editor
Simon BridglandVerified
Director at Charwin Private Clients
I think the real stroke of genius that a homeowner can show is to overpay on the mortgage within the 10% allowance and let the broker worry about the rate.
Taking a typical first time buyer mortgage from 2 years ago, at 90% loan to value.
Loan amount £196296
Fixed at 3.59% from 25/01/21 until 31/05/26
Payment over 20 yrs £1147pm
Overpaying by £853pm and paying £2000pm in total will reduce the term by 6 years and 7 months, saving £35,640 in interest.
The lender in this example has a SVR of 8.74% meaning the payment will increase to £1660 at the end of the fixed period.
Had the payment been equivalent to what the payment is now on the SVR the saving amount would be 4 years 1 month in term and £23,941 in interest.
This shows you simply don't have to be an expert to save considerable sums in mortgage costs, just being willing and able to overpay will do the trick.
Copy

Editor
Ross LaceyVerified
Director & Independent Financial Adviser at Fairview Financial Management
It's a good idea in theory but we've often recommended to clients that they save the equivalent overpayment amount into a savings account which is likely to pay a higher rate of interest than the mortgage rate they are paying. Then, when they come to remortgage they can make a lump sum overpayment which will reduce the borrowing amount and perhaps put them in a lower loan to value category which means lower rates.
Copy

Editor
Ranald MitchellVerified
Director at bad credit mortgage specialists Charwin Mortgages
Those fortunate enough to overpay can reap some big benefits from doing so. It can reduce the balance, monthly payments, the term and the loan to value. When considering overpayments to a mortgage though, for most of us, it is committed, once it is paid, you cannot redraw the money should you need it. Consideration should also be given to other higher-interest debt that may be held that is potentially zapping the monthly budget. Anyone on the cusp of a loan-to-value threshold could benefit from a lower rate banding following an overpayment. Whilst overpayments are encouraged, very few do this unless there is a particular reason to do so.
Copy

Editor
Michelle LawsonVerified
Director at Lawson Financial
There are two ways to view this. Depending on the mortgage itself, borrowers can look to overpay or they can put the money aside and either pay off annually or at the end of the product. What people need to be mindful of is that as soon as the overpayment has been made, unless you have a reserve facility, flexible or offset mortgage, it will mean you will have to apply for a further advance if you needed the funds back later. All overpayments come straight off the capital so it is important to consider your options carefully.
Copy

Editor
Justin MoyVerified
Managing Director at EHF Mortgages
Whilst clients enjoy their low mortgage rates, any additional funds could easily be providing a better return in a deposit account, attracting a much higher return in the short term. They can then look to overpay on their mortgage once the rate is about to finish, as a lump sum payment. The mortgage broker can calcuate how much is needed to be overpaid to benefit from a better rate, based on balance and current valuation figures.

This also allows the money to be used as some form of reserve for any emergencies between now and the expiry of the deal, there is much to be said about having cash available for emergencies such as illness or loss of employment.
Copy

Dan Osman0
Head of Later Life Lending (Age 55+) at UK Moneyman
This is certainly something we would recommend for clients in sight of retirement. So many people are hitting their mid 60s assuming that they will be able to raise enough through a lifetime mortgage (equity release) or that their lenders will simply let them carry on. Making overpayments is a key strategy in later-life mortgage planning and, if the rate is low enough, it offers a golden opportunity for many to put themselves in a much more financially flexible position when the salary stops.
Copy

Gary Bush0
Financial Adviser at MortgageShop.com
Anyone who can overpay, or in this case, double their monthly mortgage payments to redeem their mortgage earlier and without suffering from any redemption penalties should obviously do this to prepare for a higher rate on the horizon.
Our thoughts are that this would be for the minority of the general public mortgage account holders at this time with other inflationary pressures seriously affecting household budgets at this time.
Copy

Peter Stamford0
Mortgage Expert at Stamford Home Finance
Whilst this sounds like a good idea in theory, there is another factor to consider. With the vast majority of fixed-rate mortgages, any overpayment in excess of 10% would incur fees. I encourage overpayments whenever possible but not if the client is going to be penalised.
Copy

Scott Taylor-Barr0
Principal Adviser at Barnsdale Financial Management
Overpaying your mortgage is always a good idea, the interest saved over the lifetime of the mortgage can add up to an eye-watering sum. Ideally, if you are on an ultra-low rate, it would be great if you could increase your monthly payments to the level you can expect once that deal ends, maximizing the benefit the low rate gives you now and preparing you for what your outgoings will be in the near future. However, even if you overpay just a small amount it can make a massive difference; it's the financial equivalent of the cartoon snowball that starts off tiny at the top of the hill and grows as it rolls down the hill, even just rounding your monthly payment up to the nearest £50 will make a difference overtime and most lenders will allow you to adjust your monthly payment online or just by calling them. However, please be mindful of any Early Repayment Charges on your mortgage, as most lenders will limit the level of overpayments you can make without incurring the charge.
Copy

Rob Gill0
Managing Director at Altura Mortgage Finance
It's a great idea for mortgage borrowers still on rates starting with a 1 or a 2 to overpay their mortgage before they inevitably revert to one starting with a 4 or a 5. We recently helped clients who put their last mortgage on a 20-year term, to pay down the mortgage quicker while rates were low, extend to a 30-year term to help with monthly payments now rates are higher. The foresight to take a shorter term when they could helped make this viable.
Copy

Michael Webb0
Managing Director at Mortgage Republic
Clients who have historically low rates, and excess income monthly should be looking at what can be done most effectively with the excess disposable income. This in the current environment is probably not going to be overpaying a lower rate than you can achieve in an instant access savings account. This interest rate arbitrage is where these borrowers can have the most impact with their cash. Even if at the end of their current low rate deal, they utilise savings which will have grown to pay down their mortgage further. This will produce a better net end result for the borrower.

Added to this if the borrower sets up a standing order monthly to the savings account for the increased mortgage payment they are expecting it will halp them budget better as the change in rate rolls round for the.
Copy

Austyn JohnsonVerified
Founder at Mortgages For Actors
Overpay as much as you can, so when you go onto a higher interest rate, you have a lower capital amount to pay interest on. Plus, the more you can pay, the quicker your capital goes down and then in turn, your mortgage term can be changed.I try to advise overpaying where ever possible, even if its only £20 a month, it can help.
Copy

Gary BoakesVerified
Director at Verve Financial
The decision to make overpayments on a mortgage is a personal one, by overpaying your mortgage you will reduce the balance and therefore the interest being paid and if you are risk-averse or prefer to know that you have used your additional income or savings to pay down your mortgage then this is the right choice. Conversely, savings rates are higher than we have been used to, if you have a lower mortgage interest rate than you can get by saving into a cash savings account it may be more financially beneficial to pay into a savings account instead. Regular savings accounts can offer some of the best rates around at the moment. Most providers will usually limit you to a maximum monthly amount, so you may have to open several to get the full benefit. At the end of your mortgage fixed-rate period, you will then be able to use the amount saved to reduce the mortgage balance before your new mortgage deal starts. So the decision will come down to time and individual choice.