How to save £6,000 in mortgage interest payments
Homeowners could make significant savings and cut down their mortgage term by making small but regular overpayments, according to Compare The Market.
According to the price comparison site, someone with the average mortgage debt of £130,720, a 20-year term, and paying a fixed interest rate of 2.49 per cent could save £5,895 in interest payments by overpaying £100 a month. They would also pay off their mortgage three years and two months earlier than planned.
Those on a standard variable rate (SVR) mortgage will see higher savings by overpaying on their mortgage because they are likely to be on a more expensive interest rate. These households can save more than £13,000 on interest and knock three years and four months off their mortgage term through regular £100 overpayments.
Borrowers paying their lender’s SVR will be paying a higher interest rate than necessary so they could also save money by switching to a fixed rate. They could then use the extra cash from being on a cheaper product to make regular overpayments.
Compare The Market found that mortgage holders who overpay are willing to give up day-to-day luxuries in order to afford the extra cost.
A fifth (19 per cent) said they had not taken a holiday abroad, more than one in ten (12 per cent) delayed buying a new car, and more than a fifth (21 per cent) put off buying luxury items such as expensive clothes or gadgets.
However, the majority of mortgage holders (56 per cent) still hesitate to put aside additional money towards their debt every year. For many, this is a question of cost as more than half (55 per cent) say they cannot afford to make the extra payments and a third (33 per cent) say they have too many other outgoings, such as credit card debt and utility bills.
Mark Gordon, director of mortgages at Compare The Market, said: “Even though committing more of your paycheque towards your mortgage can seem financially daunting, even modest but regular overpayments can save you thousands in the long run. Households on standard variable rates are likely to be paying higher interest rates and have more expensive monthly mortgage commitments.
“If you are on an SVR, instead of overpaying on your mortgage it may be wise to switch to a fixed rate product which is always cheaper. You can then use that extra money to make overpayments and reduce your term even further to avoid paying unnecessary sums in interest.”