Overpaying a mortgage can save thousands in interest in the long run
Home owners with fixed rate mortgages could cut costs by £5,895 and reduce their term by over three years by overpaying their loan, according to new research.
But over half of home owners, some 56%, never overpay on their mortgage, and it means that they are spending thousands of pounds unnecessarily on their mortgage through one small oversight.
Home owners could cash in on significant savings and cut down their mortgage term, simply by making small but regular overpayments to their provider, says the study from comparethemarket.
The figures show that those on a fixed rate repayment mortgage could save £5,895 and reduce their term by three years and two months by overpaying an extra £100 a month.
For first time buyers on a fixed rate, the potential savings are even greater. With regular overpayments of £100 every month, they could reduce their mortgage term by two years and seven months and save £6,129 in interest.
Those on a standard variable rate mortgage (SVR) will see higher savings by overpaying on their mortgage because they are likely to be on a more expensive interest rate. These households can save over £13,000 on interest and knock three years and four months off their mortgage term by through regular overpayments.
Higher interest rates mean that mortgage holders on SVRs are likely to be paying over the odds. This group could instead switch to a fixed rate and use the extra cash from being on a cheaper product to make regular overpayments.
The research also found that some owners are willing to spend less on other things to overpay their loan. Some 19% said they had not taken a holiday abroad, 12% delayed buying a new car and 21% put off buying luxury items such as expensive clothes or gadgets like an iPad.
These financial sacrifices however seem a small loss, as 56% of those who have overpaid admit contributing slightly more towards their mortgage makes them feel more financially secure in the long run.
For many, there is still a question of cost with 55% saying that they cannot afford to make the extra payments and 33% saying that they have too many other outgoings, such as credit card debt and utility bills. While early repayment fees are standard across the mortgage industry, 54% of respondents agree that these charges discourage them from making overpayments.
‘Even though committing more towards your mortgage can seem financially daunting, even modest but regular overpayments can save you thousands in the long run. Households on standard variable rates are likely to be paying higher interest rates and have more expensive monthly mortgage commitments,’ said Mark Gordon, director of mortgages at comparethemarket.
‘If you are on an SVR, instead of overpaying on your mortgage it may be wise to switch to a fixed rate product which is always cheaper. You can then use that extra money to make overpayments and reduce your term even further to avoid paying unnecessary sums in interest,’ he added.