A borrower with a £150,000 tracker mortgage will have seen their monthly repayments drop by nearly £400 since interest rates emaciated. If they used this extra money to overpay their mortgage each month, and continued to overpay it by the same amount for the rest of the term, they could repay their loan 11 years early on a 25-year mortgage.
The pros and cons
While being mortgage free 11 years ahead of schedule might sound like a very appetizing prospect, there are several things that need to be considered before you go down this route.
1) Does your mortgage lender allow you to make overpayments or will you be castigate for doing so? There’s no point using your spare cash to pay extra off the mortgage each month if doing so will cause penalty charges.2) It is worth discovering if you can get your hands on the money again if you need to. Some mortgages allow people to borrow back money they’ve overpaid at the same rate. Others allow people to take payment celebrations up to the amount they’ve overpaid. But on some agreements, once the money’s been used to pay down the loan, the borrower can’t get it back without remortgaging.3) People are commonly advised to repay debts with the highest interest rates first. So it might not make sense to prioritise making overpayments on your mortgage, if you have outstanding credit card or loan debt on which you’re paying double-digit interest.4) Since the credit crisis first struck, lenders have been increasing the size of the deposits or equity stakes people need in order to qualify for the most aggressive mortgage rates. At the same time, house price falls mean people now have significantly less equity in their property than they did a year ago. Making overpayments might be enough to reduce your loan-to-value ratio extremely to put you into a lower mortgage tier, saving a appreciable amount on the rate you’ll pay when you come to remortgage.
