Mortgage overpayments explained – analysing a unique facility

Brokers weigh in on the rising popularity of overpayments

Mortgage overpayments explained – analysing a unique facility

As mortgage rates have risen significantly over the past few years, the power of overpayments for those who utilise this facility has only grown.

For example, a consumer with a mortgage rate of 2%, making a one-off overpayment of £10,000 on a mortgage debt of £250,000 over 25 years, would save £6,257 interest over the lifetime of the mortgage. However, considering these matching circumstances with the mortgage rate being 6%, then the same overpayment would save a customer £31,723.

As such, an increasing number of homeowners are making overpayments on their mortgages at present, with the intention of reducing debts and improving loan-to-value (LTV) ratios, according to advice firm Continuum.

The beauty of mortgage overpayments

Darryl Dhoffer, mortgage expert at The Mortgage Expert, said nearly all lenders will allow a 10% overpayment per 12 months on outstanding mortgage balances, with a few lenders offering a 20% overpayment, all without penalties.

Dhoffer added that the facility is there if a customer wishes to reduce their debt overall, and in turn intends to lower their monthly repayments or shorten their term.

“This is a personal choice for clients, and I stress should only be used as an option if personal income or outgoings allow; the beauty of overpayments is that it is optional,” he said.

If clients have a substantial amount of unsecured debts, then Dhoffer advises clients to look at clearing these unsecured debts before they look at making overpayments on their mortgage.

“This is because these debts will most likely already attract higher interest rates than existing mortgage rates,” Dhoffer said.

James Bull (pictured left), mortgage broker at JB Mortgages, agreed that most lenders allow overpayments on mortgages, with the industry standard being around 10% per annum on a fixed rate.

If a client is in a position to use this facility, Bull said, it would be wise to take advantage as it can save thousands of pounds and knock years off the mortgage.

“The only time I have advised against it is on the rare occasions where early repayment charges (ERCs) may apply, in which case it is usually better to hold off until the charges have expired,” he added.

Case-by-case basis

Michelle Lawson (pictured right), director and mortgage protection adviser at Lawson Financial, said that making overpayments on a mortgage should be done very much on a case-by-case basis.

“If people have savings, it is about calculating the difference between the interest received and the interest paid, so in some situations people may be better off [putting their money] in a savings account then paying off their mortgage,” she said.

Lawson added that mortgage overpayments do come straight off the capital, so some people build this into their strategy.

There are also offset mortgages, which, given the financial difficulties many are enduring currently, Lawson believes, will see increased demand.

“This is due to the flexibility of having money in a savings account benefiting an individual’s mortgage, while it remains accessible for unforeseen circumstances,” she said.

Jamie Alexander, mortgage director at Alexander Southwell Mortgage Services, also said the effectiveness of mortgage overpayments vary depending on individual circumstances, considering factors like savings and the balance between received and paid interest.

Making these decisions, Alexander added, involves assessing whether saving returns exceed mortgage costs, and he said that some individuals include overpayments in their strategy to reduce capital.

Alexander agreed with Lawson that offset mortgages offer flexibility and have gained popularity for their accessibility while benefiting the mortgage in recent times.

“The optimal choice however, hinges on mortgage interest rates versus potential savings returns; every client’s scenario is different,” he said.

Are you advising customers to utilise overpayments at present? Let us know in the comment section below.