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Low interest rates – make them pay while the sun shines

Monday 7th October 2013

With interest rates expected to remain low for the next three years, MoneySuperMarket has looked at the benefits of taking advantage of cheaper borrowing by overpaying on a mortgage for the next three years.

For those people who already have savings and are looking for alternative ways of making their money work harder in a low interest environment, overpaying on a mortgage could be a great option.

The comparison website worked out how much someone paying the average standard variable rate of 4.38% could shave off a £100,000 mortgage by overpaying £250 each month. Over three years, they would repay an additional £9600, reducing the overall mortgage balance to just £75,277. This will also help reduce the amount of interest that will be paid over the remaining term of the mortgage. Without overpayments the outstanding balance would be £84,877 after three years.

If the £250 was simply paid into a savings account each month paying an average market rate of 0.45% they would earn just £313.58 in gross interest over three years. After tax, this would equate to £252.86 for basic rate taxpayers or £188.15 for higher rate taxpayers.

For those overpaying on a mortgage for a longer term, the benefits are even more significant. Over the course of a 15 year term, overpaying £250 per month would save a staggering £12,242 in interest alone and shave four years and eight months (56 months) off the term of the mortgage. Therefore, the mortgage would be fully paid off in just over ten years. If you save £250 into a savings account paying a market average rate of 0.45%, you would end up with a total balance of £47,335.56 after 15 years - earning just £2,335.65 in interest during this period.

If you then paid off your mortgage early and put the mortgage payments you would have been making into a savings account once the mortgage ends you would have savings worth a total of £57,103.06 by the time your mortgage would have ended.

By comparison, if you save £250 into a savings account paying a market average rate of 0.45%, you would end up with a total balance of £47,335.56 after 15 years - earning just £2,335.56 in interest during this period. Therefore by opting to overpay on a mortgage instead of paying into a savings account, you would be £22,010 better off over 15 years.

Clare Francis, mortgage expert at MoneySuperMarket said: "With interest rates set to remain low for at least the next three years, it's a great time for mortgage borrowers. Not only can they benefit from the lowest mortgage rates in history, but they can also reduce the negative impact of low savings rates by channelling spare cash into the mortgage instead. Regular overpayments will help reduce the amount you owe, reduce the amount of interest you will pay over the term, and lead to you being mortgage free sooner.

"However, overpaying on a mortgage won't be the right option for everyone so it's important to think about the implications beforehand. While the benefit of keeping the money in a savings account may not be as great from an interest perspective, as least you retain easy access to that cash in case of an emergency. Once you've overpaid on your mortgage, while not impossible, it is much harder to get at that money again. Opting for an offset mortgage can be a good way around this as you can benefit from overpaying while being able to get at your savings at any time.

"Also, one other thing to bear in mind if you are thinking of overpaying on your mortgage is that most products limit the amount you can overpay by, so make sure you check this before you alter your monthly payment."

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George Bailey

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Editorial Contact Details - Conor Shilling
0845 672 6000
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