Thursday 25 August 2016

This simple trick could turn your £59 a month into £1,842 in savings


Homeowners in UK never realize that they could enjoy big savings and wipe years off their mortgage term by taking advantage of rock-bottom interest rates to make regular overpayments.

Latest research from comparison site shows that borrowers could save a combined £14billion over the next two decades by regularly overpaying.

Paying an extra £59 a month, that’s around 10% of the average monthly mortgage repayment, would reduce the term by one year and four months and save £1,842 in interest.

For first-time buyers the savings can be much bigger.

Overpaying by £68 a month – 10% of a typical £687 monthly repayment on a £142,582 loan – would chop two years and eight months off the mortgage term and save an impressive £6,553 in interest.

While many homeowners are aware of the benefits of overpayment with more than half saying it would make them feel more financially secure if they paid more towards their debt, just two-fifths of borrowers do it.

Of those who don’t overpay nearly half say they couldn’t afford the extra money and have too many other bills to pay.

Jody Baker of said: “While committing more of your wages towards your mortgage can seem financially daunting, making small contributions each month or even a one-off lump sum overpayment could save mortgage holders thousands of pounds in the long term.

“Sacrificing one meal out at a restaurant or regularly bringing lunch in to work from home could make all the difference.

“Now that interest rates have been lowered to 0.25%, overpaying on your mortgage could be seen as a savvy alternative to traditional saving and could result in some huge savings in the long term for homeowners.”

Are there any problems?

Lenders typically restrict the amount you can overpay, usually to 10% of your outstanding mortgage each year.

If your lender imposes penalties for overpaying it may be worth considering reducing the term of your loan instead.

This would mean your monthly repayments increase, so in effect you will be permanently overpaying.

But check how much the administration fee would be for this and make sure you can afford the higher repayments going forward – don’t be tempted to stretch your finances too far.

Other ways to save

Whatever your situation, it’s a good exercise to check whether you are on the best mortgage deal.

Despite the base-rate drop to 0.25% and many lenders chopping their standard variable rates (SVR), there are millions of people still paying over the odds.

That money could be spent overpaying their loan.

SVRs are not meant to be a long term product. With an average rate of 4.78% they are a lot higher than some of the best mortgage deals currently available that can be well below 3%.

Yorkshire Building Society, for example, offers a three-year fix at 2.09% for those with a 25% deposit and it comes with no fees.

And First Direct has a five-year fix at 2.18% for borrowers with a deposit of at least 25% – and that too comes with no fees.



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