It’s time to quit whimpering about dropping deposit rates and consider an alternative of increasing the loan repayment.
Millions of people who want to save choose to overpay for their mortgage instead of saving money to the special accounts that are working very poorly. By this they are getting tax-free savings that are larger than the returns they get from savings accounts.
The issue became worse after the latest news from the Bank of England. After they have cut interest rates in August, over 100 accounts were removed from it. Nowadays, the available products amount is at the lowest rate since 2007.
The situation is proved by Ishaan Malhi, the founder of the first online mortgage adviser in the UK – Trussle. He says that there’s a huge increasing in the number of customers who search for a mortgage with overpaying.
He adds: “With a 25-year mortgage of £150,000, consistently overpaying by £100 a month would pay off the mortgage four years quicker and save £18,000 in interest. This is considerably more than you’d earn putting £100 away every month in a savings account at today’s rates.”
Research by comparethemarket.com suggests that 39 per cent of people overpay at some point in their lives. Nearly a fifth (18 per cent) overpay each month and 15 per cent have overpaid by more than 10 per cent in the past 12 months. The website calculates that mortgage holders could save more than £14 billion over the next 20 years by regularly overpaying.
This is a sensible move only if the mortgage rate is higher than the interest you would get on a savings account, and with both rates historically low this isn’t always a given. “Check your mortgage rate and see how it compares to the best savings rates on offer,” advises says Ricky Knox, the founder of Tandem Bank, a lender that is due to launch next year. “Some older tracker mortgages may be below savings rates, but most are likely to be higher.”
Many homeowners are overpaying so that they can improve their loan-to-value and so get better rates when they next remortgage.
David Hollingworth, a spokesman for London & Country, the mortgage broker, says that, while it used to be rare to find products that offer the flexibility of overpaying, now the majority of lenders allow you to, typically by 10 per cent a year. Tesco Bank allows 20 per cent overpayment and some tracker rates have no early repayment charges, so you can overpay by as much as you like.
Usually you can pay lump sums on an ad hoc basis or set up regular overpayments. Some lenders automatically reduce monthly payments after an overpayment has been made or you can ask a lender to reduce the mortgage term instead.
UK homeowners could save more than £14bn by regularly overpaying
The other benefit to overpaying, says Mr Hollingworth, is that it instills the discipline of paying a certain amount each month, so when rates rise your overpayment may mean you will not have to find more money.
If you have overpaid, some lenders, such as Yorkshire Building Society, may give you a mortgage holiday, where repayments are suspended for a few months, but interest is still charged.
Rory Crone, who works in marketing, has been overpaying the mortgage on his two-bedroom flat in Wandsworth, south London, for four and a half years. He also saves into an Isa.
“I’m taking advantage of the base rate being as low as it is. My mortgage is with the Woolwich. It’s a variable rate at 2.27 per cent above the Bank of England base rate, so with that being as low as it is, it means I can afford to make a bigger dent in the overall amount.
“I have been gradually upping how much I overpay and now I pay more than double what is asked by the bank. I definitely see overpaying my mortgage as the better long-term deal.”
Alex Ardizzone, the founder of Savvy Accounting, says: “It is important to pay off other debts first, such as credit cards that incur higher interest rates. Also ensure that you have flexibility; you don’t want to plough the rainy-day fund into your mortgage and then find you need it and don’t have access to it. Some mortgages may have repayment penalties, so check your contract before you make any.”
Another consideration is an offset mortgage, which is linked to a savings account. Rather than earning interest — or paying tax — on your £20,000 savings, for example, your money is offset against your mortgage so that you don’t pay interest on £20,000 of the balance owed. This means you can clear your mortgage more quickly.
With an offset mortgage you retain access to your savings, so it is like an easy-access savings account.
Offset mortgages come with higher rates, although they have fallen recently and the gap is narrowing. Yorkshire Building Society offers offset options 0.2 percentage points above its standard deals. Moneyfacts.co.uk, the financial website, says that the average offset fixed mortgage rate in October 2011 was 4.03 per cent — in October this year it was 2.3 per cent. Go to moneysavingexpert to see what you could save.
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