Savings rates are grim, but now it’s payback time
More young people are opting to overpay on their mortgage. Shane Hickey explains
It has been a grim decade for savers and it now appears younger people are looking closer to home in an attempt to make their money work. Consumer group Which? has found that well over half of young homeowners are overpaying on their mortgages, cutting the length of time they will have to pay back their house or flat loan.
It is little surprise, with high street rates at rock bottom after a dismal decade for savers. Many commentators are now actively encouraging people to look at increasing their repayments – if budgets allow.
The Which? research shows people in London and the West Midlands are the most likely to make larger repayments with the average at almost 15%.
“While it might be surprising to hear that so many people have paid off extra chunks recently, the benefits can be massive, cutting months off the length of your loan – and, in turn, saving hundreds or even thousands in interest,” says David Blake from Which? Mortgage Advisors.
“If you haven’t done so recently, you may want to look at your re-mortgaging options to ensure you’re paying the best possible rate and have the flexibility to overpay when possible.”
Figures from Santander illustrate the effect of even small overpayments: £10 more a month on a 25-year £200,000 mortgage would save £1,146 in interest and be mortgage-free four months earlier; £100 a month on the same mortgage saves almost £10,000 in interest and cuts three years off the life of the mortgage.
While the vast majority of people use the extra repayment to reduce the length of the mortgage, a small number keep the same term, but reduce the amount they have to pay in the future. This gives homeowners some flexibility.
But there is not an unlimited amount that can be repaid. Some lenders limit the amount to 10% a year. Over that, fees may apply.
MoneySavingExpert’s Martin Lewis attributes the penalties to lenders having budgeted to make a certain amount from a mortgage and overpaying means that sum will be reduced. Anyone taking out a mortgage is advised to look carefully at the terms and conditions to see what the rules are.
However, repaying early is not for everyone. It is important that debts are prioritised and those with high interest rates – credit cards, store cards and personal loans amongst others – are dealt with first.
It is also important for borrowers to make sure they have enough funds to cover the extra repayment without sacrificing other savings, such as money for an emergency.
There are other options to make a mortgage easier to deal with. For those who are able to switch, moving to a cheaper deal after an introductory period is finished, could result in savings.
Shortening the term of the loan may reduce the amount of interest paid, but it will increase the monthly repayments which borrowers should be sure they can budget for.
While these are bad days for savers, anyone who thinks that they should repay early, rather than putting money in the bank, should examine the rates they are getting and do their sums accordingly, advises Lewis.
If you can get more in the bank than what you pay on your mortgage, then leave it in the bank. If the mortgage rate is higher, however, then look to overpay. This is also a good opportunity to ensure that you are getting the best bank rate as they vary widely.
Fast-tracked: paying just £10 a month more on a home loan can save £1,146 in interest and shave four months off its term.