Overpaying on your mortgage might seem like a no-brainer to save thousands in the long run. But, is it always the smartest move, especially as major lenders have cut their mortgage rates once again?
Several major high street lenders including Natwest, HSBC, and TSB have cut mortgage rates, meaning homeowners coming to the end of their fix term could lock in around 4 per cent. This is a drastic saving from earlier this year; in January 2024, the average five-year fixed rate was 5.55 per cent while the average two-year fixed-rate deal was at 5.93 per cent.
It comes as the Bank of England’s Monetary Policy Committee (MPC) is slated to announce its latest interest rate decision tomorrow. Reports suggest the central bank is expected to hold rates at 4.75 per cent despite pushes for a cut. With all of this in mind, are you better off overpaying on your mortgage, or stuffing your cash into a savings account?
Can I overpay my mortgage?
First of all, you need to check how much you can actually overpay – otherwise you’ll risk paying thousands in penalty fees. If you’re on a standard variable rate (SVR) mortgage, it is likely you’ll be able to overpay as much as you want without any issue (best to double check if you’re on a tracker mortgage). However, staying on an SVR rate isn’t usually the cheapest way to pay back your mortgage, so you might be better off changing to a Discounted Variable Rate or Fixed Rate Mortgage.
If you’re on a fixed-term deal, it’s likely you’ll be allowed to pay 10 per cent of your mortgage balance as an overpayment every year – without being stung by penalties. These tend to be around 1-5 per cent of the amount you overpaid, so really is worth avoiding.
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Should I overpay my mortgage?
In a guide written by Martin Lewis and updated by his Money Savings Expert team, Brits were told that working out whether overpaying your mortgage is the best thing for your finances isn’t always ‘straightforward’. “The first thing to do is check whether you should overpay your mortgage or save the cash elsewhere – a key decision you’ll need to make,” the pro’s added. “The simple rule of thumb is: If your mortgage rate is around the same, or higher than your savings rate, then it makes sense to overpay.:
While a higher savings rate could technically beat mortgage overpayments, it also depends on several factors which make the decision a little trickier. “[This includes] whether you are planning a one-off overpayment or if you want to make regular overpayments (say monthly) over the longer term, how much your mortgage debt is, how many years you have left to repay your mortgage and whether you pay tax on savings interest,” MSE wrote.
How much will I save by overpaying my mortgage?
Most lenders have an online calculator that allows you to do all the necessary number crunching when it comes to overpaying your mortgage. Below is example of somebody with a mortgage debt of £200,000 over a 25-year term. If we say their interest rate is four per cent, they’ll be paying around £1,060 each month.
If this person overpaid their mortgage by £2,000 each year – they’d be mortgage free five years earlier and will have saved a whopping £26,000 in interest alone. However, if they saved the overpayment money in a tax-free ISA at 4.93 per cent (currently the highest available) you would be £8,250 better off. This is because in 20 years time you would have £59,990 to pay off to clear the mortgage, but you’d have £68,240 in savings, more than enough to clear the balance and still have £8,250 left over – whereas if you overpaid the mortgage you would be mortgage free but wouldn’t have any money leftover. Of course, this doesn’t include overpayment fees etc. Keen to see whether you should save or overpay? Check out MSE’s mortgage overpayment calculator here.
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