Low mortgage rates and poor returns on savings may be leading homeowners to overpay on their mortgage, but this could be a poor financial decision in the current climate.
Last month (for just the second time in a decade) mortgage holders paid back more than they borrowed as the housing market cooled off, with repayments outstripping lending by £1.4bn, according to Bank of England figures.
Today’s low interest-rate environment may tempt some borrowers to overpay while their monthly mortgage repayments are low, said Rachel Springall, of personal finance analysts Moneyfacts.
Overpaying on a mortgage will reduce the amount owed, shortening the length of the loan, and incurring less interest over the lifetime of the deal.
Ms Springall said: “First-time buyers, in particular, may stand to benefit as some may have taken a longer mortgage to afford repayments, so reducing this term is a great move, as is building equity to move towards lower loan-to-value brackets where cheaper deals can be found.”
However, for those with very low mortgage rates, investing the money instead can often generate greater returns than the potential interest savings.
On a £100,000 mortgage taken over 25 years at this rate, overpaying by the maximum £10,000 each year would save around £9,600 in interest and pay off the entire loan within around eight years. At today’s savings rates, putting this money in an easy-access account instead would earn just £540 interest. Investing the money could generate significantly higher returns. Over eight years, £10,000 invested annually with an average return of 4pc would generate around £14,126. At this rate of return, investing the cash would leave the homeowner £4,526 better off than if they had used the money to make mortgage overpayments.
However, those with less equity in their home could benefit significantly from making overpayments, often saving more in interest payments than they would make in stocks and shares. Depending on your situation, you could need a return of 8% in this case, we strongly advise you contact one of our advisors at GSI Wealth Management to discuss your situation, your goals, and any potential solutions.
Adapted form an article by Will Kirkman, The Telegraph