Overpaying each month by as little as £59 – or around 10% of an average monthly payment – means mortgage holders could reduce their mortgage term by approximately one year and four months and possibly save £1,842 on interest alone, research by comparethemarket.com has found.
With nearly eight million mortgage holders in the country, this equates to around £14.3bn nationwide. For first-time buyers the potential savings are even greater: mortgage holders between 25 and 34 years old could reduce their mortgage term by approximately 2 years and 8 months and save roughly £6,553 on interest by overpaying by 10%.
Many homeowners are already aware of the benefits of overpayment. In a poll conducted by comparethemarket.com of nearly 2,000 mortgage holders, 52% said that contributing more towards their mortgage each month would make them feel more financially secure, with 19% agreeing that it would make them feel much more secure. Those who do regularly contribute extra to their mortgage overpay by an average of 4.7%.
Nearly a fifth (18%) said that they overpay every time a payment is due and 15% admitted to overpaying by more than 10% in the last twelve months.
Jody Baker, head of money at comparethemarket.com, said: “As a nation we are getting more proactive in searching for the best deals, whether on energy providers or insurance. Whilst committing more of your pay-cheque towards your mortgage can seem financially daunting, making small contributions each month, or even a one-off lump sum overpayment, could save mortgage holders thousands of pounds in the long term. Sacrificing one meal out at a restaurant or regularly bringing lunch in from home could make all the difference. Now that interest rates have been lowered to 0.25%, overpaying on your mortgage could be seen as a savvy alternative to traditional saving and could result in some huge savings in the long term for home owners.
“Many lenders will restrict the amount you can overpay, usually to 10% of your outstanding amount each year. If your bank imposes significant penalties for overpaying, depending on your circumstances it could be worth considering reducing the term of your mortgage instead. This will increase the monthly payments so in effect you will be permanently overpaying, though some lenders may charge an admin fee for altering your term.”
Many mortgage holders are willing to give up day to day luxuries in order to afford overpayments. To pay off more of their mortgage, over one in ten (11%) people delayed buying a new car, 18% had not taken a holiday abroad and over a fifth (21%) put off buying a luxury item such as expensive clothes or a new gadget such as an iPad.
However the majority of people still hesitate to put more money towards their mortgage every month, with 58% admitting to never overpaying. Of those who don’t overpay, a fifth think they have too many other outgoings such as household bills, and one in ten were not aware they could overpay on their mortgage or thought it seemed too complicated.