23% of borrowers are in credit on their mortgage after making overpayments on their account, according to research from the Yorkshire Building Society.
It says that for some, overpayments can be a way to pay off their mortgage sooner than they had originally planned; potentially reducing the amount of interest they pay over the term of the mortgage.
For others, regularly repaying more than the fixed monthly amount can help to pre-empt an expensive period in the future that could allow a payment holiday – an agreed temporary break in repayments – if the mortgage account is in sufficient credit.
Charles Mungroo, senior mortgage manager at the Yorkshire Building Society, said: “While it’s great to see so many borrowers value the option of managing their mortgage flexibly, it’s really important people understand the facts and implications of making overpayments to decide if it’s right for their circumstances.
“For example, while it could help reduce the amount of interest you pay, you can’t retrieve an overpayment if you need the money back. Likewise, it may mean you can pay off your mortgage quicker but if done wrong, could mean you incur fees. There’s a lot for borrowers to weigh up.”
Typically, lenders allow borrowers to overpay by up to 10% of the total outstanding mortgage balance each year either through regular, smaller overpayments each month or a larger one-off deduction when circumstances allow, for example receiving an inheritance.
However, borrowers unwittingly paying any more than the allowance would likely trigger early repayment charges (ERCs) on the overpayment, the amount of which varies depending on the terms of the mortgage.
For example on a £200,000 mortgage, borrowers could overpay an extra £20,000 each year before they would incur any financial penalty, but a miscalculation could see the mortgage holder charged a percentage of any additional payment over the agreed limit.
Mungroo added: “If your mortgage terms allow overpayments and you can afford to make any additional contributions, no matter how small, over time you could really start to see some benefit.
“However, taking on a mortgage is likely to be one of the biggest financial commitments you will make in your life so it’s essential you understand all the facts before making use of flexible features on your mortgage to help you manage your finances in the future.”
To help borrowers understand how overpaying on their mortgage could help them, the Yorkshire has launched a new calculator that enables them to see how even the smallest overpayments could reduce the amount of interest they pay and how much sooner they could be mortgage free.