Overpaying mortgages ‘cheaper in the long run’

Overpaying on a mortgage now could save money on in the long term due to interest rates staying low.

MoneySuperMarket claims that paying an extra £250 each month could reduce a £100,000 mortgage by almost £10,000 in three years. It argues that someone paying the current average standard variable rate of 4.38 per cent would have an outstanding balance of £84,877 in this period through normal payments, yet paying £250 more would result in paying off an additional £9,600 leaving the balance at £75,277.

Doing this, it argues, will reduce the overall interest for the remaining mortgage term. Similarly, overpaying by the same amount on a 15-year mortgage could reduce the term to a little over ten years, reducing it by four years and eight months.

The comparison service recommends people make the most of low interest to reduce their mortgages. This will reduce both time and interest in the long run, as any money used now will only face the current rates – which could go up in the future.

MoneySuperMarket believes this is better than simply saving the money, as £250 with an average market rate of 0.45 per cent would only make £313.58 gross in three years. After tax this amounts to £252.86 and £188.15 for basic and higher rate taxpayers respectively. Using the example of a 15-year mortgage, contributing £250 more a month could equal £12,242 saved through interest.

Mortgage expert Clare Francis said: "With interest rates set to remain low for at least the next three years, it's a great time for mortgage borrowers. Not only can they benefit from the lowest mortgage rates in history, but they can also reduce the negative impact of low savings rates by channelling spare cash into the mortgage instead."

The company suggests paying off the mortgage early, as the payments that would have been made at the later end of this period can then be put into savings accounts.

By Amy White