Why now's a great time to overpay your mortgage

With savings rates at rock bottom, you might be wondering where to turn to get any kind of decent return on your money. But if you have a mortgage, have you considered overpaying it?

According to the Council of Mortgage Lenders (CML), an estimated third of all borrowers have overpaid their mortgage in the last seven years.

These people have willingly paid their mortgage lenders more than they owe them, either on a regular basis or by making occasional lump sum overpayments.

And new figures from Halifax claim that mortgages are now at their most affordable level since the second quarter of 1999. Mortgage repayments currently account for just over a quarter (27%) of a new borrower's monthly income, well down on the long-term average of 36%.

But is it a good idea?

Why overpay?

Overpaying sounds strange but it actually makes sound financial sense. By paying your lender more than necessary you reduce your overall mortgage debt more quickly, and because you are charged interest on that debt, the interest you owe also reduces.

Over the long term this can have a dramatic effect on your finances, potentially saving you thousands of pounds and cutting the term of your mortgage by years.

It can also help you build up an equity buffer in your home, as the more you pay the more of your home you own. This could prove invaluable should you want to remortgage in the future. Lenders offer their best deals to those with the greatest equity, so overpaying can give you future access to cheaper mortgage rates. New research from UKMortgages says that borrowers with 10% equity will have to pay 25% more than borrowers with 40% equity.

Easier than ever?

In 2007 the base rate stood at a whopping 5.75% and the average rate on an outstanding variable rate mortgage was 6.42%.

Now the base rate has been at its all-time low of 0.5% for over four years, and mortgage rates are extremely competitive (particularly for those of us with a lot of equity).

This gives borrowers greater potential to overpay their mortgage because, for many, their interest rate and monthly repayments have plunged in recent years. Rates have fallen massively, so by simply maintaining their previous payment many borrowers are quite easily able to overpay.

['Cheapest' ever mortgage has a big catch]

Is it a good idea?

Overpaying is an excellent idea for many borrowers. It helps you to build equity in your home, which means that better deals will become available to you when you remortgage. And it saves you money, because by owing your lender less money, you are charged less interest. The cumulative savings are not to be sniffed at.

However, there is one big issue with overpaying. It can mean you lose access to that money, which isn’t very helpful if you need it in the future.

Putting your extra money into an easy access savings account or ISA may not be too appealing with interest rates currently so low, but at least your cash is there should you ever need it. Whether you lose your job, your car packs in or you are faced with an unexpected expense, having money you can get your hands on quickly is invaluable.

Of course some mortgage lenders will allow you borrow back your overpayments, or underpay in the future, providing you have built up an overpayment buffer. But it’s essential that you double check your future access to money you overpay – even with a fully flexible mortgage.

There have been recent reports of lenders refusing to allow borrowers to borrow back their overpayments, even where this was a feature of the mortgage.

Suggestions that some lenders are keeping hold of overpayments, even if the borrower is on schedule to repay the loan on time, are clearly concerning for borrowers who have already overpaid significantly, especially if you don’t have sufficient funds in a separate savings account.

Of course, each lender is different so make sure you check your lender’s policy on borrowing back overpayments or making underpayments in the future.

Money you overpay could be gone, or at least tied up in your property, until you come to sell. It might be working hard for you in your mortgage account, but that won’t be much good if you need it now. Only overpay what you can afford to be without.

[Could you save money by remortgaging? See the latest mortgage rates]