Overpaying your mortgage: why now could be the right time

Plenty has been written about how low interest rates are decimating savings returns. At present the best interest rate you can get on a savings account is two per cent - and most savers will be getting much less.

But, the flip side of the coin is that homeowners are benefitting from some of the lowest mortgage rates ever seen.

“The average interest rate for borrowers with a 10% deposit on a two-year fixed deal has dropped from 4.8% in 2013 to just 2.65% today”, the Daily Mirror reports.

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This means that homeowners are enjoying very low monthly repayments. Rather than spending the extra cash you’re saving on luxuries, or even squirrelling it away in a savings account, you may be better off handing it over to your mortgage lender anyway.

While interest rates are low you could really make strides with paying off your mortgage if you start overpaying. Paying back a bit more each month will mean you are reducing the capital you borrowed quicker, so you’ll pay less interest and clear your mortgage far quicker.

This is Money lays out one example of the potential long-term benefits of overpaying even by a small amount.

“Repaying an extra £50 a month on a 25-year £150,000 repayment mortgage priced at 2% would cut the total interest bill by £4,011 – and the loan would be repaid two years, two months early,” the website says.

Doubling the surplus payment to £100 would cut the total interest paid by £7,295, and shave just over four years off your loan period.

Of course all of that assumes rates will stay the same, which they won't forever. But even if you don't continue for the life of the mortgage, the numbers clearly add up for now - and the other benefit of overpaying is that you’ll owe less when interest rates inevitably do go up, putting you in a stronger financial position in the future.

So should you overpay your mortgage?

Clearly, you could save a lot of money by overpaying your mortgage, but it isn’t a sensible savings alternative for everyone.

First you need to take a look at your overall financial state. Any money you put towards overpaying your mortgage, you can’t get back. That means you need to have a decent savings balance that you can access for emergencies before you consider overpaying your mortgage.

Next up consider any other debts you have. The interest rates on mortgages are at record lows at the moment, but other forms of debt such as store cards, credit cards or loans are still expensive. So consider paying off higher-interest debts before you start overpaying your mortgage.

You also need to check you actually can overpay. Not every mortgage has the facility for you to make extra payments so read through your mortgage paperwork or contact your lender to find out if you are allowed.

Also, check if there is a limit on how much you can overpay by - many will limit you to ten per cent per year.