Thrifty Britons cash in on low interest rates and falling bills

Borrowers using extra cash to pay off debts, say lenders
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Britain's biggest mortgage lenders say more and more of their customers are choosing to overpay on their home loans, frustrating attempts by the Bank of England to boost the economy with ultra-low interest rates and lower monthly mortgage bills, a survey by The Independent shows.

Lloyds Banking Group – which includes the UK's largest lender, the Halifax – the Nationwide Building Society, Abbey, Barclays, HSBC, the Co-operative Bank and others have all told this newspaper that borrowers are taking the opportunity to pay off their mortgage debts rather than spend any extra cash, the opposite of what the Bank and the Treasury want.

Some lenders are witnessing dramatic changes in customers' behaviour. Indeed, the Bank of England may be disturbed to learn that many lenders and building societies are encouraging customers to overpay and cut their mortgage debts, again reducing the funds available to households to spend. Most lenders permit overpayments of about 10 per cent of a debt – but some are now raising that threshold. Customers on tracker and variable rates have seen the biggest benefit from the fall in rates, and they account for about 50 per cent of all British home loans

Lloyds Banking Group, a conglomerate that comprises Bank of Scotland, Cheltenham & Gloucester and Birmingham Midshires, as well as Lloyds TSB and Halifax, said: "More than half of our mortgage customers are saving money on mortgage payments.... the percentage of customers making regular overpayments on their mortgages has doubled compared to last year."

The group said the average saving available to mortgage customers was £290 per month, while the average overpayment was even higher, at £350 per month.

Other lenders confirmed the trend. A spokesman for Nationwide said that "anecdotally" more people were "interested in making overpayments", and that the building society was encouraging it "as much as possible".

HSBC agreed there was anecdotal evidence of rising overpayments. Bradford and Bingley said: "Mortgage overpayments have increased as a whole and, in particular, overpayments on buy-to-let mortgages have quadrupled compared to last year."

Barclays reported that "three times as many people are overpaying on their mortgages compared to last year", but said the amount overpaid was smaller.

The Co-operative Bank has seen a 56 per cent year-on-year increase in the number of customers making mortgage overpayments, with those on variable rate products three times as likely to be making overpayments than those on fixed rate mortgages. The Co-op Bank is even offering some customers the option of making additional capital repayments of up to 50 per cent of their mortgage without incurring a penalty.

Nici Audhlam-Gardiner, the director of mortgages at Abbey, added: "Some borrowers on tracker rates have been successfully reducing the amount of outstanding capital to be repaid on their mortgage and, as a result, the amount of interest owed.

"Customers are finding that keeping repayments at the same level they were before the rate cuts has allowed them to make substantial overpayments without overstretching their monthly budget."

Given the virtual drying up of new lending and the radical reduction in rates, mortgage repayments ought to have fallen dramatically. However, figures released this week by the Bank of England reveal that, for the nation as a whole, like many households, repayments are barely altered from last year, at about £2.5bn per month, though lower than in the summer. The Independent's survey adds to evidence that consumers are becoming debt averse, despite official efforts to bolster spending and combat deflation.