By opting to overpay, homeowners with spare cash are potentially cutting months or even years off their mortgage term, and saving thousands in interest payments.
Here, we reveal just how much you could save based on how much you overpaid by, and compare that with the amount you'd earn in savings interest.
One-third of mortgage holders overpay
In July, we asked 1,617 members of the public whether they overpay on their mortgage.
Two thirds of mortgage-holders (64%) told us they hadn't overpaid in the last 12 months, but 36% had.
Overall, 25% of homeowners in our survey had overpaid on a monthly basis, while 10% said they did so as a one-off payment.
Find out more:What difference does overpaying your mortgage make?
In today's high interest environment where the average two-year fixed rate is 6.36% and a five-year fix is 5.9%, overpaying your mortgage can be a great way to save money over the long term.
While you won't feel any benefit immediately, you'll pay back the loan quicker and pay less interest overall.
Regular overpayments each month
A quarter of mortgage-holders told us they overpay on a monthly basis.
Doing so can make a significant difference to the overall cost of your mortgage – even overpayments of just £5 a month can save you thousands.
The table shows how much you could theoretically save if you overpaid a set amount each month. We've calculated the figures based on a £200,000 mortgage with a 25-year term and interest rate of 6.36%.
The interest you pay will vary depending on the deal you've signed up to and the length of your fixed term. But the above table shows how extra overpayments can make a substantial difference.
Find out more:Lump sum overpayments
One in 10 told us they've overpaid by putting down a lump sum.
Putting down hundreds or thousands of pounds extra in one go isn't something many can afford to do. But there are big benefits for those who can.
Based on a £200,000 mortgage over 25 years with an interest rate of 6.36%, you could theoretically make the following savings:
Find out more:Overpay or save: what should you do with a lump sum?
We've looked at how lump sum overpayments can erode your mortgage length and cost, but what if you put the money into a savings account instead?
Currently, the best one-year savings accounts offer rates just above 6%, meaning that a lump sum of £2,500 will gain about £150 in interest in the space of a year.
It's possible to get much better yields, but you'd need to lock your money away for longer. Saving it for five years will give you the best rate:
Find out more:Those trying to steer clear of the taxman can put up to £20,000 into an Isa each year. The leading one-year fixed Isa with Charter Savings Bank currently offers 5.72% AER. There are also numerous multi-year deals available across the market.
Find out more:Regular overpayments vs regular savings: an example
For a borrower with a £200,000 mortgage on the average two-year fixed rate of 6.36% and a 25-year term, overpaying by £100 a month would save £35,006 in interest. The mortgage debt would also be cleared three years and nine months earlier.
In contrast, putting £100 a month into a savings account paying the average easy-access rate (3.2%) over the same period of time would see you earn £10,953 in interest.
Mortgage overpayment calculator
To get started, enter your balance, term, interest rate and proposed overpayment.
For an accurate picture of how overpaying could affect your balance and term, speak to your mortgage lender.
Will you be penalised for overpaying your mortgage?
Small to medium-sized overpayments are unlikely to trigger a penalty, but make sure you’re aware of your lender's early repayment charge (ERC) threshold before making hefty overpayments.
This is a sanction imposed by providers if borrowers overpay by more than it allows, or pay off the whole loan too early. The vast majority of lenders let you pay up to 10% extra each year.
For example, someone with £200,000 remaining could overpay by £19,999 in one year without facing a penalty.
The extent of the penalty varies depending on the lender and terms of your mortgage. It's usually a percentage of the outstanding mortgage – typically between 1% and 5%.
So far, it's still the only lender to do so.
Find out more:Which? Limited is registered in England and Wales to 2 Marylebone Road, London NW1 4DF, company number 00677665 and is an Introducer Appointed Representative of the following: 1. Inspop.com Ltd for the introduction of non-investment motor, home, travel and pet insurance products (FRN 610689). Inspop.com Ltd is authorised and regulated by the Financial Conduct Authority (FCA) to provide advice and arrange non-investment motor, home, travel and pet insurance products (FRN310635) and is registered in England and Wales to Greyfriars House, Greyfriars Road, Cardiff, South Wales, CF10 3AL, company number 03857130. Confused.com is a trading name of Inspop.com Ltd. 2. LifeSearch Partners Limited (FRN 656479), for the introduction of Pure Protection Contracts, who are authorised and regulated by the FCA to provide advice and arrange Pure Protection Contracts. LifeSearch Partners Ltd is registered in England and Wales to 3000a Parkway, Whiteley, Hampshire, PO15 7FX, company number 03412386. 3.Optimise Media Limited (FRN 313408), for the introduction of HSBC Group, who are authorised and regulated by the Financial Conduct Authority to provide credit brokering activity. Optimise Media is registered in England and Wales to Exchange Street Buildings, 35-37 Exchange Street, Norwich, England, NR2 1DP and company number 04455319. We do not make, nor do we seek to make, any recommendations or personalised advice on financial products or services that are regulated by the FCA, as we’re not regulated or authorised by the FCA to advise you in this way. In some cases, however, we have included links to regulated brands or providers with whom we have a commercial relationship and, if you choose to, you can buy a product from our commercial partners. If you go ahead and buy a product using our link, we will receive a commission to help fund our not-for-profit mission and our campaigns work as a champion for the UK consumer. Please note that a link alone does not constitute an endorsement by Which?.
source https://www.which.co.uk/news/article/mortgage-hack-how-to-save-thousands-in-interest-payments-agluP3G6WkxI