While mortgage market volatility continues as anticipation for further Base Rate hikes grows, concerns have been rising amongst homeowners about how much their monthly repayments will increase.
Recent figures suggest as many as 2.5 million homeowners face an extra £9billion in interest payments as fixed rate deals come to an end this year. Meanwhile, around 10 percent of mortgage products are thought to have been removed from the market due to suspected interest rate increases.
While there isn’t much that homeowners can do about interest rate rises, Adam French, personal finance expert at NerdWallet UK, said that overpaying on a mortgage while rates are lower could be a “great way to reduce the impact” of a mortgage rate increase if a person’s finances permit.
While the figures would differ depending on a person’s mortgage rate and the amount they can afford to overpay, Mr French said that even paying a “modest” amount extra can have a big impact.
He said: “Many people think that in order to make a difference, you need to overpay on your mortgage by hundreds or thousands every year, but that’s simply not the case.
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“Even a fairly modest amount of money can have a big impact on overall debt. And overpaying when your mortgage rate is low means more of it will be paying off the capital of your house as opposed to the interest.”
Mr French also pointed out the value that overpaying while a rate is lower can have on a person’s loan to value (LTV), which may help people “unlock lower interest rates” when they remortgage and need to switch to a new deal.
He said: “At the very least, paying a little extra off on your mortgage while you can afford it could help you budget now, for higher rates in the future and chip away at some of what you owe. And if you’re able to maintain modest overpayments when your rate goes up, it can have an even bigger impact.”
Providing an example, Mr French said if someone has a mortgage debt of £200,000 over 25 years, assuming this remained on a two percent interest rate, overpaying by £50 per month will save £4,114 in interest over the lifetime of their mortgage. This would then reduce their mortgage term by one year and nine months.
He continued: “Overpay an extra £50 per month off the same mortgage with an interest rate of six percent and you will save £17,664 over the lifetime of your mortgage, and reduce your mortgage term by two years.”
However, he pointed out: “Everyone’s mortgage term, loan and rate is different, and it’s worth using a mortgage calculator so you can see exactly what difference overpaying on your mortgage will do for you.
“It’s also worth bearing in mind that overpaying on your mortgage probably won’t reduce the amount you pay right now.”
Overpaying by making regular overpayments on a standard fixed rate mortgage often provides a person with two options, and Mr French suggested people speak to their lender to see which is available to them and what suits them best.
He explained: “The first is that overpaying will reduce the overall term of the mortgage, meaning your monthly payments will stay the same and you’ll just pay your mortgage off over a shorter period.”
Mr French said this can help people save money “in the long run” because they’ll be paying less interest overall – but it won’t make any difference in the short term.
The second is that it can reduce a person’s monthly payments over time. Mr French said: “In the short term, small overpayments may not make a big difference, but as interest rates are often calculated daily, overpaying, even small amounts, can make a difference after a couple of months.”
Before considering overpayments, it’s suggested that people check if their mortgage agreement allows them to overpay, and if so, by how much.
Mr French said: “This is usually a percentage of the debt taken out, but does vary. Your initial agreement should contain all the information you need, but if you are in any doubt, it’s always best to check with your mortgage provider directly.
“Be warned that if you overpay by more than the limit, you’ll usually need to pay an early repayment charge, which could negate any savings you might make in the long run.”
