How overpaying your mortgage by £20 a month can save thousands

Homeowners are striving to ease the pain of spiralling mortgage costs as further rate hikes loom. 

The Bank of England is set to bump the base rate up to 1.5 per cent tomorrow, with some experts tipping 1.75 per cent.

The average two-year mortgage fix is already at the highest level since 2013, according to financial data analysts Moneyfacts. 

And costs are on track to climb higher still, with the base rate widely expected to hit 2.25 per cent by the end of 2022.

Borrowers are racing to clear mortgage debt by funnelling spare cash into extra repayments. 

Homeowners can check how much they would have to pay to fix now with This is Money’s best mortgage rates comparison calculator created with partner L&C. 

Santander has seen overpayments shoot up by 50 per cent this year compared with 2021 — the increase coinciding with when the base rate began rising in mid-December.

The average additional payment this year is £3,750, with Santander customers clearing more than £900million of mortgage debt since the start of 2022.

Graham Sellar, head of mortgages at the bank, says: ‘With the cost of living continuing to increase and base rate steadily climbing, more people are focusing on how to manage debts and bring the future cost of their mortgage down.’

Overpaying on a mortgage translates into savings worth thousands of pounds over the long term.

Homeowners could also benefit from remortgaging, if the extra payments move them into a lower loan-to-value bracket, which typically come with better rates.

Most lenders allow borrowers on fixed deals to overpay up to 10 per cent of their loan each year before early repayment charges kick in. Those on tracker or variable rate deals are unlikely to have any limits on overpayments.

But with bills rising, even as little as £10 extra a month can make a significant difference.

Greg Cunnington, chief operating officer at broker LDNfinance, says: ‘Overpayment is particularly helpful for borrowers who have fluctuating income structures — such as those who earn commission or bonus income, or who are self-employed. The flexibility to make larger payments when they receive higher-than-normal income is very well received.’

Rough calculations compiled for Money Mail by mortgage advisory firm Private Finance show how much money borrowers with a £200,000 mortgage, taken out over 25 years on a 3.5 per cent rate, could save. 

Paying off an extra £200 a month would save £26,000 in interest payments alone, and clear the debt nearly six years earlier.

Overpaying by £100 would slash the loan cost by £15,000 and see you mortgage-free three years sooner. Even an extra £20 a month would save you £3,500 in interest and reduce your mortgage term by nine months.

If rates rise as expected, the savings are even more valuable.

At 4.5 per cent, a £200 overpayment on a £200,000 mortgage would cut your interest bill by £36,000.

An extra £100 each month becomes a saving of £21,000, while a £20 overpayment on a 4.5 per cent tariff would save you £4,900.

In many cases, the cost of the loan will fall even faster as you build up equity, allowing you to bag a lower rate.

The average five-year rate for a borrower with a 15 per cent deposit is 4.12 per cent, compared with 3.81 per cent for someone with 40 per cent of equity, according to Moneyfacts.

Experts also point out that while savings rates are improving, soaring inflation is still eroding your cash. This means overpaying your mortgage is likely to save you far more money in the long run than you could make even with the best savings deal.

Chris Sykes, of Private Finance, says: ‘Overpayments are a fantastic way to reduce overall expenditure on a mortgage, especially in the higher interest rate environment.’

Mother-of-two Nicola Jacks, 37, has been overpaying her mortgage since taking out the £184,500 loan 12 years ago. When organising her monthly repayments, the HR partner from Essex rounds up so she always pays an extra £20 or £30.

‘Sometimes, when I’ve got money left over at the end of the month, I’ll put that in, too,’ she says. ‘Every little helps.’

So far, she has made roughly £5,000 in additional payments and is on track to save an estimated £4,000 by the end of her mortgage term.

Nicola adds that recent rising interest rates mean she is making more of an effort to pay off the mortgage debt.

‘You can’t bury your head in the sand — you have to seek advice and invest in your wealth,’ she says.