How overpaying your mortgage by £20 a month can save you thousands

Homeowners are scrambling to ease the pain of spiraling mortgage costs as more rate hikes loom.

The Bank of England is set to raise the base rate to 1.5 percent tomorrow, with some pundits tipping 1.75 percent.

The two-year average mortgage correction is already at the highest level since 2013, according to financial data analysts Moneyfacts.

And costs are on track to climb even higher, with the base rate expected to hit 2.25 percent by the end of 2022.

Overpaying on a mortgage translates to thousands of pounds worth of savings

Borrowers are racing to pay off mortgage debt by funneling excess cash into additional payments.

Homeowners can check how much they would have to pay to fix it now with This is Money’s best mortgage rate comparison calculator created with partner L&C.

Santander has seen overpayments soar 50 per cent this year compared to 2021, the rise coinciding with when the base rate started rising in mid-December.

The average additional payment this year is £3,750, with Santander customers paying off more than £900m of mortgage debt since early 2022.

Graham Sellar, the bank’s head of mortgages, says: “With the continued rise in the cost of living and the steady increase in the base rate, more people are focusing on how to manage debt and lower the future cost of their mortgage.”

Overpaying on a mortgage translates to thousands of pounds worth of savings in the long run.

Homeowners could also benefit from remortgaging, if the additional payments move them to a lower level of loan-to-value, which typically comes with better rates.

Most lenders allow borrowers with fixed offers to overpay up to 10 percent of their loan each year before early repayment fees apply. Those with tracking or variable rate offers are unlikely to have limits on overpayments.

But with bills rising, even just an extra £10 a month can make a significant difference.

Greg Cunnington, COO of broker LDNfinance, says: ‘Overpayment is particularly useful for borrowers who have fluctuating income structures, such as those who earn commission or bonus income, or who are self-employed. The flexibility to make larger payments when they receive higher than normal income is very welcome.’

Rough calculations compiled for Money Mail by mortgage advisory firm Private Finance show how much money borrowers could save with a £200,000 mortgage, taken out over 25 years at a rate of 3.5 per cent.

Paying an extra £200 a month would save £26,000 in interest payments alone and pay off the debt almost six years sooner.

Overpaying £100 would slash the cost of the loan by £15,000 and see you mortgage-free three years sooner. Even an extra £20 a month would save you £3,500 in interest and reduce the term of your mortgage by nine months.

If rates rise as expected, the savings are even more valuable.

At 4.5 per cent, a £200 overpayment on a £200,000 mortgage would reduce your interest bill by £36,000.

An additional £100 each month translates into a savings of £21,000, while an overpayment of £20 on a 4.5 per cent rate would save you £4,900.

In many cases, the cost of the loan will drop even faster as you build up capital, allowing you to get a lower rate.

The average five-year rate for a borrower with a 15 percent deposit is 4.12 percent, compared with 3.81 percent for someone with 40 percent equity, according to Moneyfacts.

Experts also point out that while savings rates are improving, skyrocketing inflation continues to erode your cash. This means that overpaying your mortgage will probably save you a lot more money in the long run than you could earn with even the best savings offer.

Chris Sykes of Private Finance says: ‘Overpayments are a fantastic way to reduce your overall mortgage expense, especially in the higher interest rate environment.’

Nicola Jacks, 37-year-old mother of two, has been overpaying on her mortgage since taking out the £184,500 loan 12 years ago. When arranging her monthly payments, the Essex HR partner rounds up so that she always pays an extra £20 or £30.

“Sometimes when I have money left over at the end of the month, I put that in too,” he says. ‘Every little helps.’

So far, you have made approximately £5,000 in additional payments and are on track to save approximately £4,000 at the end of your mortgage term.

Nicola adds that the recent rise in interest rates means she’s working harder to pay off her mortgage debt.

“You can’t bury your head in the sand, you have to seek advice and invest in your wealth,” she says.

The best mortgage rates and how to find them

Mortgage rates have risen substantially as the Bank of England base rate has risen rapidly.

If you’re thinking about buying your first home, moving or remortgaging, or are a buy-to-let landlord, it’s important to get good, independent mortgage advice from a broker who can help you find the best deal.

To help our readers find the best mortgage, This is Money has partnered with independent broker L&C.

Our L&C-powered mortgage calculator can allow you to filter offers to see which ones best match your home value and deposit level.

You can also compare different fixed-rate mortgage durations, from two-year arrangements to five-year arrangements to ten-year arrangements, with monthly and total costs displayed.

Use the tool at the link below to compare the best deals, taking both fees and rates into account. You can also start an online application on your own time and save it as you go.

> Compare the best mortgage deals available now

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