If you locked into a fixed rate mortgage before 2022 and still have a year or more to run before the deal expires, it’s likely you are in the enviable position of having a low rate and relatively manageable repayments.
Whilst those exiting their historically low-priced deals in the last two years have had to adjust to a steep hike in their repayments, you have probably been watching on with interest wondering how to take strategic advantage of your position.
For those who locked into two-year deals just before the rate rises began in December 2021, the leap in repayments has been quite a shock.
Indeed, the average rate jumped from 2.34% in December 2021 to 6.85% at the peak in August 2023, according to data from Moneyfactscompare.
Many remortgagers reported their monthly repayments had more than doubled. Meanwhile, a recent study by lender Bluestone Mortgages found that around half of borrowers experienced repayment hikes of £3,000 per year.
The advice throughout this turbulent period to anyone who has been protected by a longer-term fixed rate has been to consider making overpayments.
What is overpaying?
Overpaying on your mortgage involves paying more than the usual monthly set repayment to your lender. Most mortgages allow overpayments of up to 10% without penalty.
You can make the overpayment by getting in touch with your lender, and they will discuss ways you can manage the overpayment. Most borrowers either increase the regular monthly amount or make a one-off lump sum payment.
What are the advantages of overpaying your mortgage?
If you are currently on your low rate – and have several months or years to run – overpaying could not only help reduce your loan before the inevitable rise in repayments occurs, but it could prime you for the change in finances.
David Hollingworth, associate director, communications at broker, L&C Mortgages, explained: “Overpaying, even by relatively small but regular monthly amounts, can really start to add up over time and substantially cut the mortgage balance and total interest bill over the life of the mortgage.
“That could even see the mortgage paid off before the end of the term and total interest savings can amount to thousands.
“For example, on a £200,000 repayment mortgage over 25 years at a rate of 4.50% the monthly payment would be £1,111.66 per month.
“Overpaying by £100 per month would see the mortgage repaid three years and five months early and save £21,142 in interest over the life of the mortgage.”
There’s another advantage to overpaying too. Kerry Nash of Marble Financial Planning an AR of Rosemount Financial Solutions (IFA), explained: “As things stand, it doesn’t look like rates will come back down to the lows that we have seen previously, so everyone is nervous of what their monthly payments may go up to when their existing low rate ends.
“Making a monthly overpayment now (if possible) or contributing to a monthly savings account, will get the borrowers used to a raised – but affordable for now – monthly commitment, so that when their mortgage payment does go up, it isn’t such a shock.”
Hollingworth agreed: “[Overpaying] will also have allocated more of the monthly budget to the mortgage/savings so that switching to the higher rate environment won’t be quite as big an adjustment,” he added.
Making mortgage overpayments – what to consider
Overpaying on your mortgage, whilst hugely advantageous, isn’t for everyone and even those who decide to charge ahead should do so with their eyes open.
The first thing to consider is early repayment charges (ERCs). As mentioned most lenders will allow 10% overpayment per year without charging the penalty. But it’s worth checking your paperwork or chatting with your lender to discuss the maximum amount you can overpay.
Another factor to bear in mind is any money you overpay will be locked in your home. So, think about how much of your disposable income you wish to use for overpaying and how much you may need for other reasons – such as an emergency boiler repair or similar.
Hollingworth explained: “The disadvantage of overpaying every spare penny is that it will generally be difficult to access those funds again in future.
“It may require a remortgage or application to borrow from the existing lender so it’s important to have a cash buffer to act as a rainy day fund.”
Savings – alternatives to overpaying
It’s a good idea to look into alternatives to overpaying on your mortgage before you make the decision to go ahead.
Putting the money into a savings account, for example, could be effective – especially as savings rates are currently strong.
Hollingworth said: “If you have a really low mortgage rate then you may be able to earn a higher savings rate and could be better off putting money in a savings account. However, you will need to make sure you keep rates under review as the markets are shifting all the time.”
Nash agreed, and said she recently advised a client in London to investigate ISAs before they looked at overpaying on their mortgage.
“My clients are higher rate taxpayers,” she explained, “which is why I have suggested ISAs, [as] any interest isn’t taxed.
“It would make more sense for them to pay into a savings plan whilst their mortgage deal is on such a low rate (1.29%). When their mortgage deal ends, and assuming they will go onto a higher rate at that point, they can then make a lump sum payment off the mortgage.
“For non or basic rate taxpayers though, it makes it even more sense to investigate savings rates before overpaying the mortgage.”
Nash warned there may be a temptation, if your money is put into savings, to spend it since the cash is easier to access in an account as opposed to being invested in a home.
She added: “Tax is also a consideration. If they are on a higher rate of tax and have already used an ISA allowance this year, they’d need to check that the net savings rate is enough to justify not overpaying the mortgage.”
Finally, Hollingworth also suggested people considered an offset mortgage. “This would allow cash to go into a savings account and reduce the mortgage interest but remain easily accessible.
“The downside is that offset rates will typically be higher than those on traditional deals and so you need to be sure that you will use the functionality.”
