I’m worried about recent mortgage rate rises – not because of fearing higher rates, but instead because of not taking full advantage of my current rock-bottom one.
In 2021, my partner and I fixed for five years at 1.24 per cent. We were first-time buyers in 2016, took out a two-year fix, then a three-year fix – and the original term was for 30 years, and we had a 90 per cent loan-to-value.
However, when we fixed for five years in 2021, we decided to shave five years off our mortgage term.
Also, because of house price growth and with a small lump sum payment, we qualified for a 60 per LTV – hence the low rate.
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Currently, we owe £192,470 on our mortgage with Nationwide, down from £261,000 when we bought our home.
Our mortgage payment is meant to be £1,019.04 per month, but we rounded it up last summer to £1,200 to overpay.
But we want to do more and the aim is to wipe out as much of our mortgage as possible before April 2026 and take advantage of this mega low rate.
What’s the maximum we can overpay monthly on our mortgage? Our deal says we can overpay by 10 per cent. Is it as simple as £19,247 divided by 12 – so £1,603 plus our normal payment of £1,019.14 per month?
So, we can go as high as £2,622.14 per month without penalty?
Alternatively, should we not overpay monthly and instead divert it into a savings account and then pay a lump sum at the end of the year? Does it make much difference? Via email.
David Hollingworth replies: Firstly, thanks for writing in – and welcome to the new weekly Navigate the Mortgage Maze column on This is Money.
The current hikes to interest rates are causing substantial worries to many borrowers.
It’s not only those on variable deals that are immediately impacted by base rate increases but also the huge swathe of borrowers currently locked into a fixed rate that will ultimately come to an end.
Those with an imminent end date in sight will be faced with decisions to cope with that rate hike now.
Meanwhile those with a longer fixed period to run will be buffered from all the current volatility.
Nonetheless it makes sense to make the most of the remainder of the ultra-low fixed rate and use it to your advantage.
Allocating more of your monthly budget to the mortgage will help in two ways.
Firstly, it will build a sum that can be used to reduce the mortgage and help to limit the increase in payments that higher rates will result in.
Secondly, it readjusts the monthly budgeting now which will make higher payments in the future easier to deal with, rather than having the same degree of payment shock when the current deal comes to an end.
As highlighted, there are a couple of ways that you may approach this.
You could make regular overpayments each month to eat into the mortgage balance more quickly, cutting the overall interest that will be incurred over the life of the loan.
It’s always important to check your deal to see if there will be any charges for overpaying.
Most lenders will impose Early Repayment Charges (ERCs) during a deal period but will usually allow some degree of overpayment to be made without incurring an ERC.
That is typically up to 10 per cent a year although some lenders can be more generous and allow as much as 20 per cent per annum (eg Natwest, Metro Bank and Atom Bank).
Nationwide allows up to 10 per cent a year to be repaid without charging an ERC and rather than base that overpayment limit on the outstanding balance each year, it calculates this based on the initial mortgage amount.
That should make it more generous although it makes sense to check the specifics with your lender, to understand your limit and check when the 12 month period for overpayments commences (likely to be the month following the anniversary of the mortgage or of any rate switch).
Avoiding an ERC on an overpayment is important as it could remove all the benefit.
> Check the best mortgage rates you could apply for with our calculator
Nationwide: The building society allows up to 10% to be repaid without charging an ERC
The other approach would be to put the cash away in a savings account and build a mortgage ‘war chest’ that way.
Given you have fixed in at a low point and savings rates have been rising in the meantime, this could mean you can earn more interest than you’re paying on the mortgage.
Some regular savings accounts will pay more but some easy access accounts will offer rates above 4 per cent.
Although many savers will not have to pay tax on savings interest, it would need to be factored into any evaluation of the return available on savings, especially now that rates are higher.
A basic rate tax payer has a Personal Savings Allowance allowing up to £1,000 in interest without tax, whereas a higher rate tax payer has a £500 allowance.
If you can earn more on savings than you pay on the mortgage it would be better to amass a lump sum to pay down the mortgage at the end of your fixed rate when you come to shop around for a new deal and remortgage.
If you prefer, or if rates reduce, you could periodically reduce the mortgage subject to the ERC free allowance.
If you are overpaying it’s also important to bear in mind that the cash will be hard to access at a later date.
It is important to have a rainy day fund to fall back on so you should keep some cash back rather than throw every last penny at the mortgage. You will also need to balance overpaying with contributions to save for your pension.
Planning ahead when you have several years of your fixed rate remaining should stand you in good stead.
Rates may even have eased back by then but that will only help further your efforts to pay off your mortgage more quickly and may put you in a position to consider cutting the mortgage term back again.
