Overpay mortgage to save £1,000s

Thursday, 22 January 2009 04:10

Homeowners could save thousands of pounds by overpaying on their mortgages as interest rate drops lower repayments on tracker and standard variable rate mortgages.

Lloyds TSB estimates since the base rate began to fall in December 2007, the average homeowner on a £150,000 mortgage is now saving £380 a month on repayments.

A customer who took out a variable rate mortgage in 2007 maintaining repayments at the December 2007 levels would have reduced their term by 11.5 years.

Furthermore, if the base rate holds at 1.5 per cent for the rest of the year, an extra year will fall off the mortgage term.

Lloyds TSB reports over 27,000 requests from customers to set up overpayments and the bank is writing to all its customers informing them how to make overpayments.

Banks are pushing for overpayment as it helps to build their capital bases.

HSBC, meanwhile, estimates an average borrower on a £112,756 tracker mortgage in October 2008 is now saving £218.08 per month compared to their initial payment.

"For those who can spare the extra money, making overpayments is a smart move," said Stephen Noakes, marketing director at Cheltenham & Gloucester, which forms part of Lloyds TSB.

"Not only can it trim years off your mortgage term, but with house prices falling, overpayments will help to protect the equity in your home.

"A year ago, a number of homeowners were extending their borrowing with further advances. We're now seeing a definite switch to paying down your mortgage debt."

Martijn van der Heijden, HSBC head of mortgages, warned customers not to get too accustomed to low rates and repayments to boost their income.

"There is a genuine danger for homeowners in allowing their lifestyles to become accustomed to the current low rates," he said.

"Interest rates will increase at some point and it will feel painful for those borrowers who have soaked up the benefit of lower mortgage payments by extending their spending habits."

Savings from mortgage overpayment
Based on tracker rate of 3% and a customer borrowing £150,000 over 25 years.

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