MARTIN Lewis has warned households about overpaying on their mortgage as interest rates soar.
The MoneySavingExpert (MSE) himself wrote in the latest newsletter, urging homeowners to consider using spare savings to overpay their mortgage bills.
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Martin explained that doing so could end up saving you thousands of pounds.
Ahead of the Bank of England‘s rate rise last Thursday to 5%, he wrote: “New fixed-rate mortgage deal costs are rising rapidly, as lenders believe UK interest rates may now peak at nearer 6% than 5%.
“Most have already factored in the Bank of England’s likely 13th consecutive rise due this Thursday – the cheapest fixes are roughly 1% point higher than in April (c. £50/mth more per £100,000 mortgage).”
He went on to explain that while some do not have the option to overpay due to a lack of savings, millions do.
The consumer champion then explained that there several things to bear in mind before making a decision.
Martin said his first rule is that if your mortgage rate is higher than you can earn in savings, then you could benefit from overpaying.
For example, if you saved £10,000 at 3% this would earn £300 over a year – but if you used the same amount to overpay a 5% mortgage it could reduce your costs by £500 over the same amount of time.
Martin’s next tip is to check the MSE Mortgage Overpayment Calculator to see how much you could save.
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For borrowers who are still on an older and cheaper fixed mortgage rate – Martin recommends saving instead of overpaying, but having the money ready for when the fix ends.
He gave the example of someone with a rate under 2% or 3% – you can likely earn more in top savings.
They could put the money aside until their fix ends, and at that point, consider using it towards reducing their new, likely much higher rate, mortgage.
In some cases, you may not want to overpay your mortgage, such as if you have more expensive priority debt that you should focus on first.
Martin also explained that those who haven’t yet built up an emergency fund may not want to overpay either.
It’s really important to bear in mind that lenders let you overpay 10% of your mortgage balance each year, but they do add penalties above that – so make sure you check this with your lender before making a decision.
Martin also urged borrowers to make sure the overpayments are put towards reducing the term of their mortgage, rather than just lowering your future payment.
Reducing your mortgage debt may get you a better future remortgage deal, he added.
Your loan-to-value (LTV) is the amount of your home’s current value you’re borrowing, if it’s over 60%, reducing it can mean better deals.
Martin explained that there are certain thresholds – usually 90%, 80%, 75% and 60% – where it gets cheaper.
So, if overpaying to reduce your borrowing takes you beyond a threshold, it can be beneficial.
Before making any decisions make sure to consult your lender and use mortgage overpayment calculators to work out if it’s the best move for you.
Meanwhile, for more information on the BoE’s rate rise and how it affects your mortgage see our story.
Plus, here are the banks NOT hiking mortgage rates despite the huge increase.
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