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If you’re a homeowner with a mortgage, then today’s low interest rates will probably mean one of two things:
- That you can just about keep your head above water in this recessionary environment.
- Or that you’ve got quite of lot of spare cash each month thanks to your mortgage payments being a fraction of what they use to be.
If you’re lucky enough to find yourself in the second camp, why not make use of that cash to do yourself a big favour and pay off that mortgage early?
Lloyd’s Bank research shows mortgage repayments accounted for just under one-third (32%) of average post-tax earnings in the last quarter of 2009. That’s down from almost half (47%) at the end of 2007.
Until recently, many lenders levied onerous fees on overpayments. But now the banks are strapped for cash, the rules are changing. They’re happy to get their money back early!
This trend has been taken to new highs with the announcement that Lloyds Group variable mortgage customers will be allowed to pay off up to 20% of their mortgages this year without penalty.
This new initiative applies to all customers across the group. So if you have a variable mortgage with either Lloyds, C&G, TSB, Bank of Scotland, Halifax or BM Solutions, you have up until March 31st, 2011 to take advantage.
You can either pay off whatever you like up to the 20% limit with a lump sum, or with as many smaller payments as and when you like.
If you’re not a Lloyd’s Group customer, you might still not be losing out as many of the bigger lenders already allow some early repayments without charge. Usually this is capped at about 10% a year and some only allow a maximum overpayment of £500 a month. Try paying more than this and you could be hit with a huge fee of up to 4% of the mortgage balance. So don’t forget to check what the rules are first.
The advantages of paying off your mortgage early
Say your mortgage rate is a typical 4%. If you put your spare earnings away each month in a savings account you’d be hard pressed to find an equivalent rate. And after tax has been paid on the interest you earn, you’d find it almost impossible.
But there’s an added advantage to paying off your mortgage early. Each time you pay over and above your agreed monthly repayment, that extra sum comes straight off your outstanding debt. So the following month you will owe less because your debt is smaller.
That means a bigger chunk of your standard monthly repayment goes in repaying your outstanding balance the following month, reducing the debt balance still further. The more you continue doing this, the quicker your debt will be repaid because each time you make a payment, more will be going to paying off the capital rather than the interest.
Working out how much you could save
Just how much you would save by making overpayments depends on how much and how often you overpay. So here we look at a range of scenarios showing how much you could benefit.
Taking a £100,000 mortgage with an interest rate of 3.5% over 25 years, we look at how much you would save overall by overpaying sums between £50 and £200 each month.
Without making any overpayments, your mortgage would be £499.22 a month.
For example:
1. £50 overpayment
Monthly payment: £549.22
Savings on interest payments: £14,576
Term reduced by: 3 years 6 months
2. £100 overpayment
Monthly payment: £599.22
Savings on interest payments: £25,126
Term reduced by: 5 years 11 months
3. £150 overpayment
Monthly payment: £649.22
Savings on interest payments: £33,484
Term reduced by: 7 years 11 months
4. £200 overpayment
Monthly payment: £699.22
Savings on interest payments: £40,560
Term reduced by: 9 years 7 months
So by overpaying just £50 a month you would reduce your mortgage term by three-and-a-half years as well as saving £14,500!
As if these sorts of savings weren’t good enough, there are even more benefits for those who have little equity in their homes. As you reduce your debt as a proportion of your home’s value, you should be able to get a far better mortgage deal a couple of years down the line as the best rates are reserved for those looking for a maximum 75% loan to value rate (LTV).
Lloyds reckons there’s never been a better time for the majority of people to overpay their mortgage as the average mortgage repayment has dropped by around £188 per month, whilst those on tracker deals have done even better, saving a whopping £400 a month.
There’s no doubt that overpaying on your mortgage is – as the above figures show - one of the best things you can do with your money. Of course you have to be the position of having the money to do so. But remember, the only way for interest rates to go in future is up. So the quicker you get repaying now, the better off you’ll be in the long run.
