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How overpaying your mortgage by £20 a month can save thousands

Homeowners are aiming to ease the pain of rising mortgage costs as further interest rate hikes loom.

The Bank of England will raise the base rate to 1.5 percent tomorrow, with some experts tipping it at 1.75 percent.

The average two-year mortgage interest rate is already at its highest level since 2013, according to financial data analyst Moneyfacts.

And costs are on track to rise even further, with the base rate widely expected to reach 2.25 percent by the end of 2022.

Overpaying on a mortgage translates into savings worth thousands of pounds

Overpaying on a mortgage translates into savings worth thousands of pounds

Borrowers race to pay off their mortgage debt by channeling extra money into extra repayments.

Homeowners can check how much they should pay to fix now with This is Money’s best mortgage rate comparison calculator, created with partner L&C.

In Santander, overpayments have increased by 50 percent this year compared to 2021 – the increase coincided with the rise in the base rate in mid-December.

The average extra payment this year is £3,750, with Santander customers having repaid more than £900 million in mortgage debt since the start of 2022.

Graham Sellar, head of mortgages at the bank, says: “As the cost of living continues to rise and the base interest rate steadily rises, more people are focusing on managing debt and lowering the future cost of their mortgage.”

Overpaying on a mortgage translates into savings worth thousands of pounds in the long run.

Homeowners can also take advantage of remortgages, if the extra payments push them into a lower loan-to-value bracket, which typically offers better rates.

Most lenders allow fixed-deal borrowers to overpay up to 10 percent of their loan each year before the prepayment charges kick in. Those with tracker or floating rate agreements probably don’t have a cap on overpayments.

But with bills rising, even as little as an extra £10 per month can make a significant difference.

Greg Cunnington, chief operating officer at broker LDNfinance, says, “Overpaying is especially helpful for borrowers with fluctuating income structures, such as those who earn commission or bonus income or are self-employed. The flexibility to make larger payments when they receive a higher than normal income is very well received.’

Rough calculations prepared for Money Mail by mortgage consultancy Private Finance show how much lenders with a £200,000 mortgage, taken out at a rate of 3.5 percent over 25 years, could save.

Paying off an extra £200 a month would save £26,000 in interest payments alone and settle the debt almost six years earlier.

If you overpay at £100, the loan costs would drop by £15,000 and you would be mortgage-free three years earlier. Even an extra £20 a month would save you £3,500 in interest and cut your mortgage term by nine months.

If rates rise as expected, the savings are even more valuable.

At 4.5 percent, an overpayment of £200 on a £200,000 mortgage would lower your interest account by £36,000.

An extra £100 a month will save you £21,000, while an overpayment of £20 at a 4.5 percent rate would save you £4,900.

In many cases, the cost of the loan will drop even faster as you build equity, allowing you to pay a lower rate.

The average five-year rate for a borrower with a 15 percent down payment is 4.12 percent, compared to 3.81 percent for someone with 40 percent equity, according to Moneyfacts.

Experts also point out that while the savings rate is improving, rising inflation is still eroding your money. This means that overpaying your mortgage will likely save you a lot more money in the long run than you could make even with the best savings deal.

Chris Sykes, of Private Finance, says, “Overpaying is a great way to lower overall mortgage costs, especially in a higher interest rate environment.”

The mother of two, 37-year-old Nicola Jacks, has overpaid her mortgage since taking out the £184,500 loan 12 years ago. When organizing her monthly repayments, the Essex HR partner rounds up so she always pays an extra £20 or £30.

“Sometimes when I have money left over at the end of the month, I put that in too,” she says. “Every little bit helps.”

So far she has made around £5,000 in additional payments and is on track to save an estimated £4,000 by the end of her mortgage term.

Nicola adds that the recent rising interest rates have made her more effort to pay off the mortgage debt.

“You can’t bury your head in the sand, you have to seek advice and invest in your assets,” she says.

Best Mortgage Rates and How to Find Them

1659634510 283 UK recession explained What mortgage interest rates rise means for

1659634510 283 UK recession explained What mortgage interest rates rise means for

Mortgage rates have risen significantly as the Bank of England base rate has risen rapidly.

If you want to buy, move or transfer your first home, it is important to get good independent mortgage advice from a broker who can help you find the best deal.

To help our readers find the best mortgage, This is Money partners with independent, free broker L&C.

U.S mortgage calculation powered by L&C, you can filter deals to see which ones match your home’s value and deposit level.

You can also compare different mortgage interest terms, from two years fixed to five years and ten years fixed, with monthly and total costs shown.

Use the tool on the link below to compare the best deals, taking into account both fees and rates. You can also start an application online on your own time and save it as you go.

> Compare the best mortgage deals now

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