Perhaps you have lockdown savings sitting idle. If so, now could be the perfect time to consider overpaying your mortgage.
Even an extra £100 a month could slash your total interest bill by nearly £10,000 — and clear your debt four years early.
Britain’s band of ‘accidental savers’, who were forced to cut back on spending during lockdown, have stockpiled more than £150billion over the past year.
Overpay: Perhaps you have lockdown savings sitting idle. If so, now could be the perfect time to consider overpaying your mortgage
Yet this money will earn precious little if stored with banks and building societies.
The average easy-access savings rate pays just 0.16 per cent. And such pitiful rates on cash deposits has made paying down debt even more attractive.
Putting an extra £200 a month towards your mortgage over the life of the loan would save £16,262 in interest and knock off seven years.
This is based on a typical mortgage balance of £138,600, an average lifetime tracker rate of 2.59 per cent, and a 25-year term.
How much you save will vary depending on the size of your loan and type of mortgage deal.
Matthew Carter, head of mortgages and savings at Coventry Building Society, says: ‘Six million people in the UK have become “accidental savers” through the pandemic.
‘That’s millions of people who could make their savings work harder.
And you don’t need a huge pot to see the benefits.’
Even paying an extra £50 a month saves £5,413 in interest and reduces the loan’s lifespan by two years. And you can always stop making overpayments if you need to, or you could choose to make a few one-off contributions when you have cash to spare.
Jinesh Vohra was fortunate enough to be able to pay off his mortgage speedily, saving £70,000 worth of interest payments.
He is the founder of Sprive — a new fee-free app designed to help homeowners clear their mortgages faster.
The app launches in July and will work in tandem with most major lenders.
Mr Vohra explains: ‘Lenders front-load interest payments. In the earlier years, monthly payments are mostly interest.
‘The earlier that people start making overpayments, the more interest will be saved compared to later in life.’
He says a key aim should be to settle your mortgage as quickly as possible, within your means but not at the expense of your lifestyle.
Just £1 a day makes an impact — £3,443 less interest and one year less of mortgage repayments.
You can simply contact your lender to ask about ways to overpay.
Some might automatically use the money to reduce your monthly payments. If the aim is to pay off your loan early, tell your lender to reduce the term instead.
Paying more each month can also lead to cheaper deals. When the mortgage balance is reduced, you have a smaller loan relative to your property’s value. This is known as a lower loan-to-value, or LTV for short.
A mortgage of £150,000 on a property worth £ 200,000 equals a 75 per cent LTV, for example.
Lower mortgage rates are offered to homeowners with lower LTVs. However, there are rules to follow and caveats to note with mortgage overpayments.
Most lenders allow fee free overpayments of up to 10 per cent of the outstanding balance each year, while some deals allow unlimited overpayments. Others have little or no flexibility. Check with your lender before taking action. Getting it wrong could trigger a penalty between 1 and 5 per cent of an overpayment.
Don’t forget that we all still need ‘rainy day’ savings, too — for when a car or boiler breaks down, for instance. And other more costly debts may also be a priority.
Holly Andrews, managing director at KIS Finance, says : ‘ Your mortgage is likely to be the cheapest debt you have.
‘It makes sense to pay off any credit cards, overdrafts or unsecured personal loans first — because these tend to have higher interest rates.’
If you want to hedge your bets it’s worth considering an ‘offset mortgage’.
This is a special type of mortgage with a linked savings account. Rather than earn interest, savings are used to reduce mortgage interest. Take a £100,000 mortgage as an example.
If you have £20,000 in a linked savings account, you only pay interest on £80,000. You are free to dip into your savings at any time, and whatever is left in the account continues to reduce the mortgage.
Speak to a mortgage broker about your options if your current deal ends soon. For help finding a broker, you can use independent website unbiased.co.uk.
We cleared our loan and saved £44,000
Leeson Antrobus knows the power of using savings to quash a home loan
Married father-of-one Leeson Antrobus knows the power of using savings to quash a home loan.
He took out an offset deal with Coventry Building Society on the first working day of 2018.
It covered his much-loved ‘wonky’ four-bedroom, semi-detached home in Somerset. The debt was settled in full at the start of 2020 — seven years early — saving him £44,000 interest.
Leeson, 50, is himself a broker and runs Maywood Mortgages.
He says: ‘We wanted to repay our mortgage as quickly as possible, and we knew that we had to up the tempo if we were to enter our sixth decade mortgage-free. Every penny we had spare went into it.’
Leeson warns that offset mortgages are rarely suitable for borrowers if they do not have much left in savings after buying their home, but a broker will be able to explore when the time is right to switch to one.
Maintaining control over savings is another benefit of offset, compared with overpaying on traditional mortgages.
Leeson explains: ‘You don’t need permission from your lender for your money back if something happens and you need access to it.’
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