Planning to move soon? Then overpay your mortgage now

HOMeOWNerS hoping to move up the property ladder should overpay on their mortgage now while rates are low to help ensure they get the house they want in the future.

thousands of first-home owners are ready to move to a bigger home. Many have started a family and want more space. Others need to relocate for work.

Yet nearly two-thirds of these ‘second steppers’ are stuck where they are and unable to move, according to a Lloyds tSB report.

in the past, homeowners have relied on rising house prices to help them secure their next home. Buyers used the profit they made from selling their first home to bump up their deposit for the second.

But flat, or in some areas falling, property prices mean t he amount of equity buyers have in their home is being eroded.

On average, UK house prices have increased just 1 pc in the past year, according to Land registry figures, with the North east, North West, east Midlands and Yorkshire and the Humber all reporting price drops.

tough economic conditions also mean pay rises many people hoped for haven’t materialised.

As a result, first-home owners are struggling to raise the deposit they need to move up the property ladder.

Borrowers could put aside some extra cash each month to boost their deposit. But with savings rates so low, the majority of people would actually be better off using this money to overpay on their current mortgage as the interest charged on it is likely to be far higher than anything you could earn in a typical savings account.

For example, if the interest rate on your mortgage is 4 pc, you would need to find an account that paid 5 pc before tax to match what you would save by paying off your mortgage. Higherrate taxpayers would need to earn at least 6.7 pc — and these rates are simply not available.

Overpaying your mortgage also helps you increase the amount of equity i n your home more quickly and knocks years off your mortgage term.

For example, if you have a 4 pc mortgage on a £150,000 loan taken over 25 years your monthly, repayments will be £ 792. After five years you’ll owe £130,657.

Yet if you overpay by just £ 50 every month you’ll reduce what you owe after five years by £3,315 to £127,342.

if you continue to overpay throughout the mortgage term, you’ll save £9,521 in interest and repay your loan two years and four months early.

Overpay by £100 a month and your balance after five years will drop to £124,027 — £6,630 less than not overpaying.

Over the term, this would save you £17,105 in interest and clear your loan four years and three months early.

Stretch to overpaying by £200 a month a nd y our balance after five years will be £117,397 —£13,260 less.

Continue to do this and you’ll save £28,465 in interest and pay off your debt seven years, four months early.

David Hollingworth, of brokers London & Country, says: ‘Homeowners can clearly get a better return by overpaying right now.

‘And because mortgage rates are so l ow it i s also more affordable — l ower monthly repayments mean it should be easier to find some extra cash’.

What’s more, the bigger your deposit, the better rates you’ll be eligible for. it’s not unusual for those with just a 10 pc deposit to pay double the interest rate those with 40 pc do. And even if stumping up a 40 pc deposit is out of the question, increasing your deposit by as little as 5 pc can make all the difference. For example, for borrowers with a 10 pc deposit, a leading twoyear fixed deal costs 3.69 pc with Chelsea Building Society.

But with a 15 pc deposit they could get a 3.48 pc deal with Nottingham BS — which also has a cheaper fee at £ 999 compared to Chelsea’s £1,675.

the majority of mortgage lenders now let their customers overpay 10 pc of their outstanding balance each year penalty-free.

But this can vary, so check your terms and conditions carefully.