As many as one in five homeowners are taking advantage of low interest rates by overpaying on their mortgages, according to Santander.
Research by the bank has revealed that 19% of homeowners are overpaying on their mortgage by £181 per month on average.
It also found that 6% are making a single one-off payment worth an average of £1,919.
The figures show that homeowners are making inroads into their mortgage loans while rates remain at record-low levels.
Around one in four (24%) said they had overpaid in the last year, while around one in eight (13%) said they had started to overpay within the last six months.
Why overpay on your mortgage?
Mortgage rates have steadily fallen throughout 2013 to the lowest level in a generation.
This has allowed homeowners to agree cheaper mortgage deals for new purchases and to remortgage existing properties at much lower rates.
Homeowners can then elect to use some of the savings they would have made to overpay on their standard monthly payments and reduce the mortgage loan.
In the long term, this could save thousands of pounds on a mortgage and reduce the term by a number of years.
It is also a strategic move at a time when savings accounts are performing poorly. Homeowners could save far more through overpayments than they would otherwise accrue through the majority of savings accounts.
The best instant access savings account currently offers 1.9% (ignoring higher performing current accounts for now) – falling to just 1.52% after tax. Even with a much improved mortgage product, the interest rate is still likely to be double that amount.
So, it can easily prove a more efficient use of resources to pool extra funds into overpaying a mortgage while the conditions are suitable.
According to our early repayment calculator, overpaying £181 per month on a £200,000 mortgage at 3.5% would save £24,118 over the mortgage lifetime and reduce the term by five-and-a-half years.
(See how much you could save using our early repayment calculator.)
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Does your mortgage allow overpayments?
Invariably, lenders will have different rules about overpayments, and it’s not always the best documented information.
Santander’s review found that around one in four (23%) had no idea about the options available to them, while one in seven (14%) knew that they could overpay on their mortgage but did not know the charges they would face.
In the first instance, the ability to repay may depend on the type of mortgage. Fixed-rate mortgages, especially those arranged within the last two or three years, are much more likely to apply charges for overpayments.
Tracker mortgages, while susceptible to interest rate changes, are more likely to allow overpayments without penalty, but a limit of 10% per year may still be applied.
Offset mortgages, though traditionally more expensive, tend to offer the greatest flexibility to repay more without incurring charges.
Those who are considering making overpayments on their mortgage should consult their terms for more details about any charges that would be applied.
Check out our guide to fixed rate vs. variable rate mortgages for more details.
How important is overpaying for you?
If you are considering changing your mortgage in the near future, ask yourself whether the ability to overpay might influence the type of mortgage you should pursue.
A change of mortgage may also prove to be a useful opportunity to make a one-off payment to reduce the loan at the point of switching.
Homeowners who are able to reduce the value of their loan at this juncture may be fortunate enough to reduce their loan-to-value ratio down to a lower threshold and benefit from a better rate in the process.
Check out our whole-of-market coverage for details of all available mortgages.
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