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Could it pay to overpay your mortgage?

Could it pay to overpay your mortgage?

Category: Mortgages

Updated: 28/11/2011
First Published: 28/11/2011

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

UK homeowners have been told they could be tens of thousands of pounds better off by overpaying their mortgages instead of saving money separately.

Figures from first direct show that, based on taking out a £100,000 mortgage and current average saving and mortgage rates, if borrowers paid the minimum repayment on their loan and saved £300 a month in a separate savings account over the 25 year term they would actually be £42,909 worse off once they have paid off the loan.

However, by comparison if they had overpaid £300 a month on their mortgage they could pay it off 12 years early, saving £23,903 by paying back £123,084 rather than £146,988 over 25 years.

If they then continue paying the same amount into savings for the remainder of the term they would have £17,762 more in savings than if they had saved £300 for the 25 years - this effectively means they are £41,665 better off than by scenario one at the end of the term.

Those who can afford to overpay the same mortgage by £200 a month could shave nine years and six months off their mortgage, and be £33,000 better off at the end of the term than if they had saved separately.

These borrowers would pay back £19,300 less on their mortgage and have £13,700 more in savings.

"The analysis shows that borrowers are often better off paying down their debt ahead of saving as historically the average rate of interest paid on a mortgage has been consistently higher than the average amount earned by saving," Richard Tolchard, senior mortgage product manager at first direct, commented.

"However, that is not to say that we shouldn't save, it is always advisable to have a sum set aside for a rainy day.

"An offset mortgage offers the best of both worlds; offering easy access to your savings while still helping you to reduce the overall interest you pay, and ultimately, the term of the loan."

Mortgage rates have been consistently higher than savings rates over the past decade - at their highest average mortgage rates peaked at 6.56% in September 2007 while average savings rates peaked at 4.58% at the same time.

The largest difference between rates was in September 2009 when the average mortgage rate was 3.69% and the average savings rate 1.03% - a difference of 2.66%.

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