Rising interest rates have led to a big increase in homeowners seeking to overpay their mortgage. More than £6 billion of overpayments were made in the last three months of 2022 - the highest level in more than 20 years.
For anyone with spare cash, increasing mortgage payments to manage future debt sounds like a good idea. Doing so reduces the total amount owed, meaning lower interest payments. It also reduces the loan-to-value ratio, potentially unlocking better deals if you need to switch lender.
However, higher interest rates also mean better savings deals, so borrowers need to weigh up overpaying against putting money aside to cover higher mortgage payments in future
Interest rates have been rising steadily since December 2021 - from 0.1% to 5%. This has increased the cost of borrowing, meaning that people who are coming to the end of fixed rate mortgage deals face much higher monthly payments.
While there are rules and penalties associated with early repayments for people on fixed rates, there is usually room to make some payments to reduce the term of your mortgage and your overall debt.
According to David Hollingworth of brokers L&C Mortgages: “Adjusting the amount of a monthly budget allocated towards the mortgage will help to squeeze more value out of the current deal. That could be through making overpayments each month, or saving a regular amount to build up a fund that can be used to reduce the mortgage at the most appropriate moment.”
If you are thinking of overpaying, it is important to avoid overstretching yourself. Make sure you keep enough money back in savings for emergencies and pay off more expensive loans such as credit card debts first.
Read more about this story in the Guardian.