New research by comparethemarket.com has found that UK mortgage holders could save over £14bn over the next two decades by regularly overpaying the mortgages.
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. With nearly eight million mortgage holders in the UK, this equates to around £14.3 billion 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 two years and eight months and save roughly £6,553 on interest by overpaying by 10%.
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%.
18% said that they overpay every time a payment is due and 15% admitted to overpaying by more than 10% in the last 12 months.
To pay off more of their mortgage, 11% of people delayed buying a new car, 18% had not taken a holiday abroad and 21% put off buying a luxury item such as expensive clothes or a new gadget.
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.
Of those who do not overpay, 44% thought they couldn’t afford the extra payments, yet respondents also said they spent on average £167 each month on non-necessity items, with 9% admitting to more than £300. 25-34 year olds admitted to spending closer to £210 on luxuries such as going out for dinner or attending the theatre.
Meanwhile, in the last six months 19% of mortgage holders switched energy provider, 43% shopped around for more competitive deals on insurance products, 18% used a 0% interest credit card and 48% researched vouchers and deals online.
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.”