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Many homeowners have opted to overpay on their mortgage to combat potential further base rate hikes.
“As we look at the prospect of more increases to interest rates and further rises in the cost of living, it’s no surprise that more people are looking at where they can put their money now, to keep the future costs of owning their home lower,” said Graham Sellar, Head of Development, Homes at Santander UK.
In contrast, 7% of UK borrowers opted to overpay on their mortgage in the first half of 2021, according to insurance broker LifeSearch.
Cumulatively, this amounted to £7 billion from January 2021 to August 2021, with the average borrower overspending £319 on their mortgage.
To illustrate how much overpaying on your mortgage can save you, Santander provided a real-life example in their press release. Based on an Annual Equivalent Rate (AER) of 2.00%, a customer taking a £200,000 mortgage over a 25-year term could save £877 in interest by overpaying £10 a month.
In addition, they would be able to celebrate being mortgage-free four months earlier than expected.
Alternatively, if that same person made a £5,000 one-off payment instead they would save £3,181 in interest over the 25 years.
It is important to note that this example is calculated at a fixed rate of interest and does not consider fluctuating interest rates.
Before you make any overpayments on your mortgage you should find out if your bank or building society will charge you a fee. It is common for some lenders to let you repay 10% of your mortgage a year before any fee on further repayments.
In addition, if you are looking into overpaying your mortgage then you should be aware that it is difficult to release the money you have put into your mortgage.
Therefore, depending on the amount of money you wish to overpay on your mortgage, it may be better for you to invest this money into a savings account. On top of any interest you may earn and depending on the type of savings account you choose, you will have access to your cash in case of an emergency.
One common method of overpaying your mortgage is to increase repayments and therefore shorten its length, as illustrated in the first example provided by Santander.
In the other example, you can also overpay your mortgage by making a one-off deposit. It is an option which is used by consumers who have received a large sum of money, such as an inheritance or gift.
If you would like to overpay on your mortgage, consider speaking to a mortgage broker who can provide the best advice to suit your individual circumstances.
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