UK HOMEOWNERS OVERPAY MORTGAGE BY A RECORD £6.7BILLION IN Q4 2022

Thursday May 4, 2023

Homeowners are making unprecedented levels of mortgage overpayments as they strive to decrease the amount they owe amidst the escalation of mortgage rates.

Homeowners in the UK made a record £6.7 billion in mortgage overpayments during the final quarter of 2022, marking the first time that overpayments have exceeded £6 billion in a quarter since records began in 1999. The Equity Release Council also reported that mortgage overpayments totaled £23.3 billion in 2022.

The increase in mortgage overpayments is believed to be a response to the rising interest rates that the Bank of England introduced to curb stubbornly high inflation. Making overpayments on a mortgage reduces the outstanding amount owed, offsetting the impact of higher borrowing costs.

Understanding Mortgage Overpayments

Mortgage overpayments refer to any payment made to the lender that is above the standard monthly repayments. Homeowners can make one-off lump-sum payments or increase the monthly repayment amount over the mortgage term. Most lenders allow overpayments of up to 10% of the outstanding amount owed per year without penalties, while some lenders allow overpayments of up to 20%.

Advantages of Mortgage Overpayments

The main benefit of making overpayments on a mortgage is that it reduces the amount of interest paid over the mortgage’s lifetime. For instance, increasing monthly repayments by £100 from £1,055 to £1,155 on a £200,000 loan over 25 years with an interest rate of 4% would result in interest savings of just over £18,000, with a mortgage term that is three years and five months shorter.

Mortgage overpayments can also help to offset the impact of rising interest rates. For example, if a homeowner with a £200,000 mortgage at 2% interest rate faces an increase in monthly repayments to £1,055 when their deal ends, they can offset the increase by making a 10% overpayment, reducing their outstanding mortgage to £180,000 and decreasing their new monthly repayments to only £950. By making overpayments, the amount owed relative to the home’s value decreases, allowing homeowners to benefit from lower mortgage rates.

Making overpayments on a mortgage can also make homeowners eligible for better mortgage deals. Banks and building societies usually reserve the best deals for people with an LTV (loan to value) of 60% or less.

How to Overpay a Mortgage

Homeowners can make one-off lump sum payments or smaller regular overpayments to their lender. It is important to only make overpayments that they can afford. One-off lump sum payments typically have a more significant impact on the mortgage than regular overpayments. For example, making a one-off overpayment of £20,000 at the beginning of a £200,000 mortgage with a 4% interest rate can result in interest savings of £30,179 and a loan repayment three years and 11 months early.

Can You Overpay on an Interest-Only Mortgage?

Overpaying on a repayment mortgage reduces the total amount owed, resulting in reduced interest and faster loan repayment. Overpaying on an interest-only mortgage can help to reduce future interest payments, but it does not help to reduce the overall debt owed.