Can I overpay to take advantage of my mega-low mortgage rate?

I am concerned about the recent rises in mortgage rates – not because I fear higher rates, but because I am not taking full advantage of my current low.

In 2021, my partner and I have locked in at 1.24 percent for five years. We were first-time buyers in 2016, took a two-year fix and then a three-year fix — and the original term was 30 years, and we had a 90 percent loan-to-value ratio.

But when we lock in for five years in 2021, we decided to take five years off our mortgage.

Due to the rise in house prices and with a small lump sum payment, we also qualified for 60 per LTV – hence the low rate.

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We currently owe £192,470 on our Nationwide mortgage, down from £261,000 when we bought our house.

Our mortgage payment should be £1,019.04 a month but we rounded it up to £1,200 last summer to overpay.

But we want to do more and the aim is to pay off as much of our mortgage as possible before April 2026 and to take advantage of this mega low rate.

What is the maximum that we can overpay monthly on our mortgage? Our deal says we can overpay 10 percent. Is it as simple as £19,247 divided by 12 – so £1,603 plus our regular payment of £1,019.14 per month?

So we can go up to £2,622.14 per month without penalty?

Otherwise, shouldn’t we pay too much every month and put this in a savings account and then pay an amount in one go at the end of the year? Does it matter much? Via email.

David Hollingworth replies: First of all, thanks for writing – and welcome to the new weekly Navigate the Mortgage Maze column on This is Money.

Current interest rate hikes are a major concern for many borrowers.

It’s not just those with variable deals that are immediately affected by base rate increases, but also the huge amount of borrowers currently locked into a fixed rate, which will eventually come to an end.

Those who have an approaching end date in sight will be faced with choices to cope with that rate hike now.

Meanwhile, those with longer fixed maturities will be buffered against all of the current volatility.

Nevertheless, it makes sense to make the most of the remaining portion of the ultra-low fixed rate and use it to your advantage.

Allocating more of your monthly budget to the mortgage helps in two ways.

First, it builds up an amount that can be used to lower the mortgage and limit the rise in payments that come with higher rates.

Second, it adjusts monthly budgeting now, making higher payments easier to handle in the future, rather than the same degree of payment shock when the current deal expires.

As indicated, there are a number of ways you can approach this.

You can regularly overpay each month to eat up the mortgage balance faster, reducing the total interest incurred over the life of the loan.

It’s always important to check your deal to see if there are charges for overpaying.

Most lenders will charge early repayment fees (ERCs) during a deal period, but will usually allow some degree of overpayment without incurring an ERC.

That’s usually up to 10 percent per annum, although some lenders can be more generous and allow as much as 20 percent per annum (e.g., Natwest, Metro Bank, and Atom Bank).

Nationwide allows up to 10 percent a year to be repaid without charging an ERC and instead of basing that overpayment limit each year on the outstanding balance, it calculates it based on the original mortgage amount.

That should make it generous, although it makes sense to check the details with your lender, to understand your limit and check when the 12 month overpayment period starts (probably the month after the mortgage anniversary or of an interest rate change). .

Avoiding an ERC for overpayment is important as it could take away all the benefits.

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The other approach would be to put the money in a savings account and build up a mortgage ‘war chest’ that way.

Since you’ve hit rock bottom and savings rates are rising in the meantime, this could mean you could be earning more interest than you’re paying on the mortgage.

Some regular savings accounts will pay more, but some easy access accounts offer rates of more than 4 percent.

While many savers do not have to pay tax on savings interest, it should be factored into any evaluation of the available return on savings, especially now that rates are higher.

A base rate taxpayer has a personal savings deduction that allows up to £1,000 in interest free of tax, while a higher rate taxpayer has a £500 allowance.

If you can earn more from savings than you pay on the mortgage, it’s better to amass a lump sum to pay off the mortgage at the end of your fixed rate when you come shopping for a new deal and a new mortgage.

If you wish or if rates fall, you can periodically reduce the mortgage subject to the ERC-free fee.

If you pay too much, it is also important to keep in mind that the money will be difficult to access at a later date.

It’s important to have a rainy-day fund to fall back on, so you should keep some money in reserve instead of throwing every last penny at the mortgage. You also need to balance overpayments with premiums to save for retirement.

Planning ahead if you have several years left of your fixed rate should serve you well.

By then, rates may have even been reduced, but that will only help your efforts to pay off your mortgage more quickly and allow you to consider shortening the mortgage term again.