Sav­ings rates are grim, but now it’s pay­back time

More young peo­ple are opt­ing to over­pay on their mort­gage. Shane Hickey ex­plains

The Observer - - Cash -

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.

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