Posted by Following the numerous base rate cuts over recent months, many borrowers have seen their mortgage repayments fall sharply. As a result a number of banks have reported that there has been an increase in the number of homeowners that are overpaying on their mortgages each month as a means of saving money.
Borrowers will find that by keeping their repayments the same even though interest rates have dropped they could cut years from their mortgage term and could also save thousands of pounds in interest over the term of the loan. Industry officials are advising consumers to overpay wherever possible to save them money and get out of debt more quickly.
As an example, a homeowner on a lifetime tracker mortgage paying around £1,000 per month a few months ago would have seen their minimum payment drop to £690 now. If rates stay at their historic low and the homeowner continued paying £1,000 per month, they could expect to save £16,000 over the term and pay off their mortgage nine years early!
The simple truth is that the cost of debt is normally much higher than the interest on savings. The exceptions are where there are penalties for clearing the debt or where the debt is exceptionally cheap for introductory purposes or other reasons.
Assuming you have various debts it’s common sense that you should pay off the most expensive ones first. As mortgages are normally cheaper than credit cards or loans, you should focus on paying the latter off first. One exception, however, is official loans from the Student Loans Company where the interest rate is significantly lower than elsewhere.
Once these more expensive debts have been repaid, now is the time to consider paying off your mortgage by diverting regular savings from elsewhere. In essence if your mortgage rate is higher than the net of tax savings rate you should look to start making additional payments towards your mortgage.
To illustrate this, if you had a £10,000 mortgage debt at 5%, your annual interest cost per annum would be £500. However, if you had savings of £10,000 receiving say 3% after tax you would be receiving £300 interest per annum. Diverting your £10,000 savings to repay part of your mortgage would save you £200 per annum!
However, before taking this course of action there are a couple of things to check first:
- If you are in a position to overpay your mortgage you need to check what your lender will allow you to do. Each lender will have different rules so check the small print first. For example some may let you overpay a maximum amount per month or a percentage of the capital borrowed per month or per year.
- Don’t divert too much towards your mortgage leaving you with no readily available cash for emergencies etc
If this all appears relevant to yourself give it some serious consideration and it may provide you with a great solution if you are looking for ways on how to save money in this climate.
