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Half of homeowners overpay on their mortgage: should you?

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Poor interest rates on savings accounts are encouraging homeowners to overpay on their mortgage, with 18-24 year olds leading the pack, new research reveals.

Almost half (46%) of homeowners overpaid on their mortgage last year with as many as seven in 10 under-25s paying off more of their loan than previously arranged.

Consumer group Which? surveyed more than 3,500 homeowners with mortgages and found that people in London and the West Midlands were the most likely to be making overpayments on their mortgages, while Scotland had the lowest level of overpayments.

Paying down a mortgage early is so popular with some homeowners that a quarter are paying extra towards their mortgage on a monthly basis, with an average overpayment from June 2017 to June 2018 of 14.3%.

Poor interest rates from savings accounts could be one factor driving the high levels of mortgage overpayments, Which? said.

Should you overpay on your mortgage or not?

The positives of overpaying your mortgage are obvious.

“Reducing the mortgage amount as quickly as possible not only gets you a step closer to owning your own home outright, but also potentially saves hundreds, even thousands, of pounds in interest over the term of the loan,” says Andrew Montlake of broker Coreco.

“The more equity you build up in the property, the less likely you will be constrained or dip into negative equity should there be a period where house prices fall.”

With savings account interest still low, you’re arguably better off paying down your mortgage.

However, if you have other debts like personal loans or credit cards, these should be tackled first.

You also need to think about what you might need the overpayment money for – what happens if your boiler breaks or your car needs an MOT?

Another important point to consider is that some lenders limit the amount you can overpay a year and you may be charged.

Montlake says: “Check out the terms and conditions of the mortgage product as some do come with Early Repayment Charges if any amount is paid off before the end of the initial fixed or tracker rate period. That said, most lenders do now allow borrowers to repay up to 10% of the loan amount each year without penalty.”

Is an offset mortgage a better option?

Montlake says people who think they’ll be able to overpay considerably should consider the benefits of an offset mortgage.

He explains: “With these products any overpayments are held in a separate offset account linked to the mortgage, which gives you the advantage of being able to draw that money back should you need it at any time.

“The cash you build up in the account is offset against the mortgage balance, so if you have £100,000 accumulated against a £300,000 mortgage, you are only charged interest on £200,000 of the mortgage. This allows you to benefit from reduced payments or use the additional savings to reduce the mortgage balance quicker.”

For more, see The pros and cons of overpaying your mortgage

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