Between 2013 and 2017, the amount being overpaid on UK mortgages increased by 25%. Initially, the amount overpaid was £14.1 million but later increased to £17.6 million. Generally, borrowers are overpaying on their mortgages to save money in interest. Currently many borrowers are opting to overpay as much as possible before a rise in interest rates occurs.
Easier to Overpay
AA Mortgages has dramatically cut the minimum amount borrowers are allowed to overpay in one go. Previously, the minimum amount was £500, whereas now it is only £1. The company’s motivation behind such a reduction is to make it simpler for their customers to clear their mortgage early. Furthermore, borrowers can easily pay regular, small amounts that can ultimately make a significant difference.
A Useful Gimmick?
AA Mortgages appear to be helping their customers, however brokers still view the deal as a “Gimmick”. Nevertheless, it is an important reminder of how much overpayment can save borrowers in the long term. Although paying an additional £1 per month won’t make much of a difference, an extra £100 can make an impact.
Assuming a 2% interest rate for a 25-year mortgage of £300,000, an extra £100 would take two years and three months off the overall term. This would reduce the interest paid from £81,469 to £73,446, thus saving £8,023. If the borrower was able to overpay by £500 per month, they would reduce the term to 16 years and 8 months as well as saving £28,689.
Many lenders will allow up to 10% of the loan amount to be overpaid each year without charge for the duration of the introductory fixed, tracker or discount period. Over-payments that go beyond 10% usually face a fee between 3% and 5%. Other lenders allow borrowers to overpay up to 20% without any charge.
Can You Overpay?
It is important for borrowers to consider whether overpayment is right for them. For example, if there is any outstanding credit card debt, this should be cleared first because it will be on a higher interest rate.
Additionally, once an overpayment has been made the money can’t be taken back. Borrowers who can make overpayments but want to keep access to their extra money should consider an offset mortgage. These allow borrowers to make unlimited, penalty free payments into a separate savings or current account. The money is then deducted from the mortgage for interest calculations but borrowers can withdraw at any time.
