Mortgage overpayment is something many homeowners with a mortgage may well be considering. But is it worth it?
The Bank of England base rate is currently at an historic low of 1.5%. It is anticipated by many experts that this may well fall even lower.
Following the numerous base rate cuts over recent months, many borrowers have seen their mortgage repayments fall sharply.
Those on fixed rate mortgage arrangements will not see changes until their fixed term comes to an end. However, those on variable or tracker rate mortgages will be enjoying the benefit of the reduced interest rates.
Mortgage overpayment can save thousands of pounds. Your outstanding debt is reduced and the amount of interest owed is reduced along with the mortgage term.
Lloyds TSB, part of the Lloyds Banking Group, recently reported that it had received over 27,000 requests from customers to make mortgage overpayments since the base rate was cut to 1.5%.
According to Lloyds TSB, if a customer who took out a variable rate mortgage in 2007 maintained their monthly repayment at the level it was at in December 2007, they would have reduced their mortgage term by 11.5 years.
Stephen Noakes, marketing director of Cheltenham & Gloucester, also part of the Lloyds Banking Group, recently said ‘Homeowners with a tracker mortgage are hundreds of pounds a month better off. For those who can spare the extra money, making repayments is a smart move. Not only can you trim years off your mortgage term, but with house prices falling, overpayments will help protect the equity in your home.’
The point about protecting the equity in your home is an important one to consider.
As the mortgage providers have become increasingly wary of lending money, they have lowered the amount you can borrow relative to the value of your property.
This means that whereas previously you may have been able to get a mortgage for 90% or more of the value of your property, today this is likely to be a lot lower. The loan to value (LTV) ratio is now much lower meaning you have to find a bigger deposit.
So previously a deposit of 10% or less will have been required, today the deposit invariably needs to be a lot higher. Mortgage lenders are offering their best deals for LTVs of around 60% or even less, or put the other way, for mortgages with deposits of 40% or more.
As LTV requirements have changed so significantly and as the market value of property has fallen considerably, you may be faced with issues over your LTV ratio when you come to remortgage.
With your mortgage overpayment you are helping to push down your LTV ratio and it should help you if you remortgage.
You will of course need to consider your own personal circumstances before deciding to make a mortgage overpayment.
If you have other debts, such as on credit cards or through a personal loan, it may be beneficial for you to pay off or reduce these first as the interest rates being charged are likely to be higher than on your mortgage.
If you are in a position to overpay your mortgage you need to check what your lender will allow you to do. Each lender will have different rules. For example some may let you overpay a maximum amount per month or a percentage of the capital borrowed per month or per year.
Also be careful not to overpay beyond what your lender allows otherwise you could be faced with an early repayment charge. This could be sizeable so needs consideration.
You need to check when your lender will apply the overpayment to your mortgage and when they calculate the interest on it. If the answer to either of these points is anything other than daily you may want consider the timing of your overpayment to maximise your benefit.
Finally if you are using your money to make overpayments be careful to consider whether you need access to that money at all. Depending on the type of mortgage you have, you may or may not be able to access it again.
So, mortgage overpayment, is it worth it? As can be seen there are clearly many advantages in making overpayments and you could save thousands of pounds as a result. Always though consider your own personal circumstances to make sure it is the best option for you.