When there's no saving graces, why not knock years off the mortgage?

With rates so low, you can save a lot more interest by overpaying than you can earn by putting surplus cash in a deposit account. Chiara Cavaglieri reports

It's a question on many home-owners' lips: what to do with the spare cash in their pockets now rates have been slashed so dramatically that some borrowers on tracker mortgages for example, are now paying less than 1 per cent in interest. Should they simply enjoy the lower repayments and save the extra cash, or start overpaying to knock years, and possibly thousands of pounds in interest, off their mortgage?

The benefits of overpaying can be impressive. Take a £200,000 repayment mortgage with 20 years remaining and an interest rate that has fallen from 5.5 to 3.5 per cent: the monthly cost would be down from £1,375.77 to £1,159.92. But a borrower who opted to keep repayments at the original, higher level would save over £69,000 in interest and be able to clear the mortgage four years early.

With savings accounts currently offering very low rates many homeowners will also save more in interest by overpaying than they can earn by putting money away. Indeed, the number of customers making overpayments at the Co-operative bank has increased by 50 per cent in the past year. "They see it as a safe haven for any surplus money and at the same time they are reducing their commitment to their mortgage," says Terry Jordan, the Co-op's head of mortgages.

Overpaying also has important benefits in the light of falling house prices and the threat of negative equity, as borrowers can maintain or possibly increase their equity in the property – a strategy that could also prove vital when borrowers reach the end of their deal. "Not making overpayments, and letting the equity erode as house prices fall, can affect the rate you achieve on remortgaging," says Richard Morea, technical manager at broker London & Country.

However, overpayments are not without their dangers. With unemployment expected to rise sharply over the next few years, can we risk piling money into our mortgages? "It is normally better to pay off the mortgage as quickly as possible, but practically, you need to have savings put aside in case of emergency" says Mike Pendergast at independent adviser Zen Financial Services.

"Make sure that you've got at least three months of working capital as a buffer fund in the bank, in case of redundancy or temporary loss of income," adds Simon Webster, managing director of Facts & Figures, the chartered financial planner.

Additionally, borrowers might not have a free hand in the amount of extra money they put into their mortgage. For example, while standard variable rate deals usually permit unlimited overpayments, others will only allow overpayments of 10 per cent of the mortgage value each year, and some may have early repayment charges.

Homeowners also need to consider both the timing and the size of any overpayment. Nationwide, for instance, only allows an extra £500 per month without penalty. Find out when your lender calculates the interest (it is usually on a daily or monthly basis), then make sure your overpayment is made in time to be calculated immediately.

But what happens if borrowers make overpayments but then fall on hard times and find themselves struggling to meet their monthly mortgage costs? In such circumstances, lenders are unlikely to allow stretched homeowners to claw back that money However, the option may exist to take a "payment holiday" to the value of any overpayments made previously.

Homeowners on an offset mortgage can overpay into their linked savings account, with the assurance that the money can be withdrawn easily should they lose their jobs. With offset deals, interest is calculated daily, so any overpayments will reduce the interest straight away.

With mortgage rates so low, though, homeowners should make it a priority to pay off credit cards and store cards. "The first rule of financial planning is to clear your most expensive debt first," explains Mr Webster.

Some homeowners may be better off using any surplus cash to pay for accident, sickness or unemployment (ASU) insurance, which will enable them to cover their mortgage for up to 12 months in the event of being unable to work.

Mr Webster says that typical premiums for each £100 of income paid are currently available at £2.77 per month for ASU, or £2.18 if you opt for unemployment only. So to cover a monthly mortgage repayment of £500 would cost £13.85 a month.

"This recession has made us all increasingly risk averse. Loss of income through redundancy or sickness is now a real threat. In exchange for a modest premium, insurance makes it one less thing to worry about," adds Mr Webster.

However, as with any insurance policy there will be exclusions, and one of the most important is that you may not be able to make a claim if you are already under threat of redundancy, as the insurance firm might judge you to have been aware of the impending job loss. In addition, in the case of sickness, some insurance policies will only pay out if the claimant is unable to work at any job rather than simply their own occupation.

Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Marketing Services Manager - (communications, testing, DM)

    £32000 - £35000 per annum + benefits: Ashdown Group: Marketing Services Manage...

    Guru Careers: Finance Account Manager

    £Neg. (DOE) + Excellent Benefits: Guru Careers: A Finance Account Manager with...

    Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

    £40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

    Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

    £45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

    Day In a Page

    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas
    La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

    Deaf community outraged by La Famille Bélier

    The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
    10 best high-end laptops

    10 best high-end laptops

    From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
    Susie Wolff: A driving force in battle for equality behind the wheel

    Susie Wolff: A driving force in battle for equality behind the wheel

    The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
    Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

    'No abs Adam' plans to muscle in on Usain Bolt's turf

    After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
    Calls for a military mental health 'quality mark'

    Homeless Veterans campaign

    Expert calls for military mental health 'quality mark'
    Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

    Meet Racton Man

    Analysis shows famous skeleton was a 6ft Bronze Age superman
    Garden Bridge: St Paul’s adds to £175m project’s troubled waters

    Garden Bridge

    St Paul’s adds to £175m project’s troubled waters
    Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

    Stuff your own Christmas mouse ornament

    An evening class in taxidermy with a festive feel
    Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

    Joint Enterprise

    The legal doctrine which critics say has caused hundreds of miscarriages of justice
    Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

    Freud and Eros

    Love, Lust and Longing at the Freud Museum