If you’ve ever wondered whether it’s worth making mortgage overpayments, then new research1 could help you decide.
The data shows the benefits of a monthly £10 overpayment with interest rates at their current low level and illustrates that even modest overpayments can make a difference to the day when borrowers become mortgage free.
If a borrower took out a £200,000 mortgage over a 25-year term, they could save £1,146 in interest (based on current rates) and become mortgage-free four months earlier. By making a £100 overpayment each month on a £200,000 mortgage, a borrower could save £9,948 in interest and reduce their mortgage term by three years in the process.
Those with a £500,000 mortgage, making the same £100 mortgage overpayment, could save over £10,000 in interest and become mortgage-free one year and five months earlier.
Don’t forget to save too
Whilst these figures show that modest levels of overpayment can prove effective, especially if you are close to remortgaging, it’s important to remember to keep some savings aside for rainy day events such as unexpected bills and expenses.
It is recommended that you keep an emergency fund of 3-6 months of your monthly outgoings. For example, if you spend £2,000 per month on your mortgage and bills, then you should have £6,000 – £12,000 saved. This does not have to be kept as cash in your bank account, but should be accessible within a week in case you require it.
However, once you have built up this emergency fund then any additional savings can be used for mortgage overpayments. It is the dream of many to be mortgage free, so this new research provides some tangible benefits of doing so. Mortgage overpayments are the key to reducing your overall mortgage term.
Mortgage overpayments as interest rates increase
As of January 2023, interest rates have soared in the past 12 months and the days of low interest rates are behind us. This means that the money saved through making a mortgage overpayment is even higher. Whereas there may be an argument for not making mortgage overpayments in times of low rates, this cannot be said now as the average mortgage rates touch 6%.
As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.