How a £20 a month mortgage overpayment can save thousands

Homeowners are scrambling to ease the pain of spiraling mortgage costs as another increase in interest rates looms.

The Bank of England is set to raise its base rate to 1.5 percent tomorrow, with some experts heading for 1.75 percent.

The average two-year mortgage fix is ​​already at the highest level since 2013, according to financial data analysts Moneyfacts.

And costs are trending higher, with the base rate widely expected to reach 2.25 percent by the end of 2022.

Borrowers race to settle mortgage debt by converting excess funds into additional payments.

Homeowners can check how much they’ll have to pay to fix it now with the Best Money Mortgage Rate Comparison Calculator created with partner L&C.

Santander has seen overpayments rise 50 percent this year compared to 2021 — and the increase coincides with the time the base rate started to rise in mid-December.

The average extra payment this year was £3,750, as Santander customers have settled more than £900m of mortgage debt since the start of 2022.

“With the cost of living continuing to rise and the base rate steadily rising, more people are focusing on how to manage debt and lower the future cost of their mortgage,” says Graham Sellar, the bank’s head of mortgages.

Overpaying for a mortgage translates into savings worth thousands of pounds over the long term.

Homeowners can also benefit from a remortgage, if the extra payments move them into a lower loan-to-value bracket, which usually comes with better rates.

Most lenders allow fixed deal borrowers to overpay up to 10 percent of their loans each year before early payment fees kick in. And lenders are unlikely to have any restrictions on overpayments.

But with bills so high, even as little as an extra £10 a month can make a huge difference.

Greg Cunnington, chief operating officer at LDNfinance broker, says: “Overpayments are particularly beneficial to borrowers with volatile income structures – such as those who earn commission or additional income, or who are self-employed. The flexibility to make larger payments when they receive income above The Usual was very well received.

Rough calculations compiled for Money Mail by mortgage advisory firm Private Finance show how much money borrowers with a £200,000 mortgage, taken out over 25 years at a rate of 3.5 per cent, could save.

Paying the extra £200 a month would save £26,000 in interest payments alone, clearing debts nearly six years early.

A £100 overpayment would reduce the cost of the loan by £15,000 and see you mortgage-free three years earlier. Even an extra £20 a month will save you £3,500 in interest and reduce your mortgage term by nine months.

If rates rise as expected, the savings are more valuable.

At 4.5 per cent, an overpayment of £200 on a £200,000 mortgage would reduce your interest bill by £36,000.

An extra £100 each month becomes a saving of £21,000, while an overpayment of £20 on a 4.5 per cent tariff would save you £4,900.

In many cases, the cost of the loan will come down faster as you build up capital, allowing you to get a lower rate.

According to Moneyfacts, the average five-year rate for a borrower with a 15 percent deposit is 4.12 percent, compared to 3.81 percent for someone with 40 percent equity.

Experts also point out that while savings rates are improving, high inflation can still eat away at your money. This means that your mortgage overpayment will likely save you a lot more money in the long run than you could make with even the best savings deal.

“Overpayments are a great way to reduce overall mortgage spending, especially in a high interest rate environment,” says Chris Sykes, Private.

Mother-of-two Nicola Jack, 37, has been paying more on her mortgage since taking out a £184,500 loan 12 years ago. When regulating their monthly payments, our Essex HR Partner rounds up so you always pay an extra £20 or £30.

“Sometimes, when I have money left at the end of the month, I’ll put it down, too,” she says. ‘Every small aid.’

To date, she has made nearly £5,000 in down payments and is on track to save an estimated £4,000 by the end of her mortgage term.

Nicola adds that the recent rise in interest rates means she is making more efforts to pay down her mortgage debt.

“You can’t bury your head in the sand – you have to seek advice and invest in your wealth,” she says.