Mortgage payments: Why paying more now might help you save in the long term

Your home is your safe haven, your escape from work, and a place to relax with your loved ones. So, considering recent events — rising mortgage rates and declining houses prices — it would be natural to feel a degree of concern.

According to Unbiased, mortgage rates may have fallen from their autumn 2022 peak of around 6% — April 19th 2023 the best rates for two-and five-year fixed rates sit at 4.08% and 3.81% respectively — yet they could rise again if the Bank of England (BoE) base rate goes up.

One potential option open to you is to consider overpaying on your mortgage today as this could help you to save money over the long term. Read on to discover why rising mortgage rates are causing some homeowners concern, as well as the benefits and potential downsides of overpaying now.

Mortgage rates seem to have stabilised but are currently much higher than they were in the autumn of 2021

Mortgage rates have stabilised slightly since they soared to over 6% in the autumn of 2022. However, the BoE increased the base rate to 4.25% on 27 March 2023 — its 11th increase since hitting an all-time low of 0.1% at the onset of the pandemic — meaning that mortgage rates have increased significantly in the last year.

If you might be about to see your fixed-rate deal mature — potentially losing favourable terms you may have previously agreed at historically low rates of 2% or less — you could suddenly be exposed to a substantial rise in your mortgage costs.

According to Unbiased, fixed-rate deals were as low as 0.84% in October 2021 and 57% of mortgages coming up for renewal in 2023 were fixed at rates below 2%.

Meanwhile, Rightmove reports as of 18 April 2023 the average rates for homeowners seeking a fixed-term mortgage are as shown by the table below:

 

Source: Rightmove

If your mortgage deal is due to mature this year, it is likely that any new products that are available will be at much higher rates than your existing deal.

So, if you have surplus funds in place, it might be worth considering the benefits of overpaying on your mortgage now to avoid paying out more over the long term.

The benefits of overpaying on your mortgage

Opting to overpay on your mortgage instalments can have a range of benefits. You might be able to:

• Pay off your debt sooner
• Reduce the amount of interest owed over the term of the agreement
• Get a sizeable regular outgoing off your books, potentially freeing up cash to use elsewhere.

The respective benefits of overpaying on your mortgage are potentially greater the more you opt to overpay each month. MoneySavingExpert breaks down the potential reduction in your mortgage term — and savings on total interest paid — on a £150,000 mortgage over a 25-year term:

Source: MoneySavingExpert

An overpayment of as little as £10 a month can produce sizeable savings in the long term. The more you opt to overpay, the greater the reduction in your mortgage term and total interest owed.

The savings can be even more substantial if you’re exposed to rates higher than 4%, which may be likely given the current mortgage market and potential for the BoE’s base rate to increase again this year.

Overpaying now, and reducing your existing mortgage debt, might also help you qualify for a lower loan-to-value (LTV) deal in the future with access to better fixed-rate options, which could be highly beneficial in the long run.

3 potential downsides to consider before overpaying on your mortgage

1. You could pay significant charges and fees

Opting to overpay on your monthly mortgage payments — whether you’re on a fixed-, tracker-, or variable-rate mortgage agreement — could result in an early repayment charge (ERC).

ERCs normally range between 1% and 5% of the amount you overpay.

Although, there can be some flexibility — dependent on your lender — such as:

• Their terms might allow for a 10% overpayment each year during your initial tie-in period.
• If your agreement is on a tracker-rate, or your lender’s standard variable rate (SVR), it might mean you’re able to overpay as much as you want without incurring ERCs.

It is vital that you carefully review the terms of your deal before making any major decisions.

2. You are likely to lose access to valuable funds, which may be needed elsewhere

Once you’ve overpaid on your mortgage, it makes it more difficult to access this money later on without remortgaging your home. So, it may leave you short-handed if needs arise elsewhere and you require funds to cover a sudden expense.

Whatever you decide, it is advisable to set aside an emergency fund first. This safety net would ideally give you access to savings for between three to six months’ worth of crucial bills.

3. You could put your money to better use dealing with other debts or generating investment growth

Overpaying on your mortgage has its benefits, but your funds might be more useful by being put to use elsewhere, such as:

• Paying off credit card debts, which could be affected by rising interest rates, and don’t offer any equity in return for your debt payments
• Potentially being able to generate growth on your funds through investing them that outweighs any mortgage-related savings.

Get in touch

Ultimately the decision is all about your personal circumstances. Opting to overpay on your mortgage could have significant financial and emotional wellbeing benefits. However, you could see greater benefits from opting to save or invest your money.

A good first step before making any final decisions is to consult your financial planner by emailing us at helpme@aspirellp.co.uk or calling 0117 9303510.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.