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Overpay mortgage while low rates last
By This Is Money
Updated:11:41 EST, 5 January 2011
Homeowners are paying off mortgages more quickly, reducing their outstanding debt by £6.1bn during the three months to the end of September, the Bank of England revealed last week.
Capital idea: Most lenders will allow overpayments on initial deals
We answer your questions about making overpayments on your mortgage.
Why are so many overpaying?
A combination of low interest rates and continuing economic uncertainty means it makes sense to pay off as much debt as possible.
With savings rates at a record low, householders are unlikely to get a decent return on their money elsewhere.
Anyone on a variable-rate mortgage has probably seen their costs plummet in line with the Bank of England base rate, which has been at a record low of 0.5% for 20 months.
The average two-year fixed mortgage rate in 2008 was 6.59% — yet the average standard variable rate (SVR) is now 4.75%. This means someone with a £150,000 mortgage has seen their monthly repayments drop from £1,021 to £855 — a saving of £166 per month.
Those fortunate enough to be on even lower rates of 2.5% are paying just £673 — a saving of £348.
While these savings have been a lifeline for those struggling with unemployment, many have repaid more of the capital they owe.Can you get a cheaper mortgage?
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Why should I overpay?
Making overpayments means you will pay off your mortgage more quickly and pay less interest.
If a borrower paying 3% on a loan of £150,000 over 25 years overpays by £100 a month, it would reduce the term by four years and save £11,842 in interest.
Those overpaying by £400 a month would save £30,181 and reduce the term by 11 years.
›› Poll: Should you overpay on your mortgage or save the money?
How much can I overpay?
Most lenders allow borrowers to overpay on initial deals — for example, a two-year fixed rate or five-year tracker — by up to 10% of their mortgage balance per year.
Pay more than this and you are likely to be penalised. Most lenders are flexible and allow you to overpay either monthly or in lump sums.
However, Alliance & Leicester, now part of Santander, only allows overpayments of more than £500 to be made once a year in January.
Stroud & Swindon BS allows 25% within the initial deal — good if you have a two-year deal, but less beneficial if you have a five-year deal.
Once your initial deal ends and you move to a SVR or lifetime tracker, you can normally overpay as much as you like.
Smaller repayments can be made monthly, but large overpayments should be made as soon as possible to reduce interest.
Don't miss: Our full guide to how to clear your mortgage early
Category: Mortgage payment