Homeowners could pay back their mortgage a year early if they used the money saved from the recent cuts to National Insurance to overpay their home loan, experts say.
The reductions in national insurance contributions came into effect on January 6 and will reduce the amount paid by the average worker by £450 per year.
Around 27 million people will see a 2p cut on their NICs after Chancellor Jeremy Hunt cut the rate from 12 per cent to 10 per cent in last November’s Autumn Statement.
Pay off your house sooner: if you put money that would have gone towards national insurance premiums towards a mortgage, an average homeowner could save £7,405, says Santander
Calculations from major bank Santander now suggest that an employee on a £30,000 salary who spends his entire savings of £29 a month on his mortgage would save £7,405 in interest.
In addition, they would become mortgage-free more than a year earlier than planned. This is based on a 25-year mortgage of £200,000, with an interest rate of 4.7 per cent.
Santander added that even overpaying €10 per month would make a difference, allowing the same customer to reduce their total interest bill by €2,500 and shorten the term of their mortgage by four months.
To unlock the total savings, they would need to maintain these additional repayments over the life of the mortgage, even if the rate of NICs changed.
The calculation also assumes the same mortgage interest rate for the term.
Graham Sellar, head of business development mortgages at Santander, said: ‘Many people will soon see the first benefits of the National Insurance cut in their pay packet.
‘For those who are able to do so, using this extra money each month to overpay on their mortgage can have huge long-term benefits, saving thousands and helping them achieve the mortgage-free dream sooner than expected. ‘
Those earning higher salaries could benefit even more. Someone earning between £60,000 and £100,000 a year would make an NI saving of £63 a month, according to Santander.
If they use the same £200,000 mortgage as in the example above, they could save £15,0933 in interest and extend the term by over two years.
| Monthly overpayments | Interest saved over the term of the mortgage | Time deducted from the mortgage term |
|---|---|---|
| £10 | £2,652 | 4 months |
| £12 | £3,169 | 5 months |
| £29 | £7,405 | 1 year 1 month |
| £45 | £11,145 | 1 year 8 months |
| £62 | £14,881 | 2 years 3 months |
| £63 | £15,093 | 2 years 4 months |
| Source: Santander. Based on a £200,000 mortgage, 25 years at 4.7 per cent | ||
Reduction: this shows the annual ‘savings’ that employees can make by cutting back on NICs – although they can also be held back by frozen tax bands, as we explain below
When should you overpay your mortgage?
Because this is the largest debt most people have, the first thought when they have more money and want to cut back on their debt is to overpay their mortgage.
This is especially the case as many have seen their mortgage payments become more expensive over the past year.
In 2023, Santander customers overpaid a total of £903 million across the lender’s online and mobile channels, a 78 percent increase on the previous year. In the first week of 2024 alone, 18,198 overpayments were made online.
Mark Harris, CEO of mortgage broker SPF Private Clients, says: ‘Paying too much on your mortgage makes sense if you have money left over. This allows you to repay the debt faster, meaning you pay less interest in the long term.
“Better yet, if you get some extra money and can use it to overpay, you won’t ‘miss’ it.”
However, it is not always the right move, especially if you have other debts whose repayment is more urgent or the interest rate is higher.
It’s also important to only pay money into your mortgage that you can afford.
While it is sometimes possible to get back money you paid in mortgage overpayments, this is not always allowed and rarely easy to do.
Harris added: ‘If you have expensive debts, such as credit cards or an overdraft, it may make more sense to pay that off first rather than overpaying on the mortgage, which has a lower interest rate.
‘It’s also important to keep some money back to cover emergencies, as the overpayment on the mortgage can be very difficult to get back.
“As a general rule of thumb, up to six months of expenses set aside as a rainy day fund will give you peace of mind.”
If you still have a relatively low mortgage interest rate, it is also worth considering putting the money in a savings account, where you pay a higher interest rate.
This could allow you to grow your pot and spend more on the mortgage later, when you can take out a new mortgage and interest rates could rise.
How much can you overpay?
Most lenders allow customers to overpay a certain percentage of their mortgage balance each year without incurring early repayment fees.
This limit is often 10 percent. However, it’s important to check your lender’s rules and the terms of your deal before overpaying.
Do the sums: It’s a good idea to figure out how much overpaying can save your mortgage
The 10 percent limit will often be based on the outstanding balance and applies every year. However, you should check whether this means one year from completion, or every calendar year, as lender rules vary.
However, some lenders base the 10 percent limit on the original balance, so it is always wise to check the details of the individual product and lender.
Other lenders offer more generous ERC-free overpayments, such as Natwest and Metro Bank, which allow up to 20 percent per year for those who manage to pay back more.
How do you pay too much?
There are two ways to overpay on your mortgage, between which borrowers are usually free to choose.
The first affects payment. So, for example, this month you pay € 1,000 and next month you may pay € 975 because you paid too much.
The second form of overpayment affects the term of your mortgage.
The term of the mortgage is actually the term of the mortgage. For example 25 years.
When you have this type of overpayment model, your monthly payments remain the same, but each payment essentially reduces a larger portion of the mortgage balance. This is the only way to become mortgage-free faster.
In concrete terms, the advice of Chris Sykes, technical director and senior mortgage broker at Private Finance is: ‘If you pay too much, call the lender and they will give you instructions. Once you have these instructions, you can use the account number and sort code you are transferring to over and over again.
‘If you bank online with your lender, you can usually do so easily via there.
‘If you want to overpay, the sooner you do so, the more money you will save in interest costs. So if you are unsure about saving for a year and paying a lump sum instead of paying monthly, it is better to pay monthly.’
Beware of the stealth tax
While many workers will benefit from the National Insurance cut, frozen income tax thresholds will still leave millions worse off, hampering their ability to spend money on things like over-payments on mortgages.
The salary thresholds at which you start paying income tax, or move into the 20 percent or 40 percent bracket, were frozen for four years in 2021, and in 2022 Chancellor Jeremy Hunt extended the freeze for a further two years.
It means that they will remain the same until 2027-2028, even as inflation rises and the real value of people’s money decreases.
Keeping the income tax threshold frozen at the basic rate, rather than raising it in line with inflation, will see more of people’s income hit the 20 percent tax levy.
The consequences are especially punishing for those who receive a raise.
If we keep the point at which people pay 40 per cent tax at the current threshold, it means that those whose pay rise gives them more than £50,270 will see their income tax on the extra money double.
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