Martin Lewis brands the mortgage market 'perverse'
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In the weekly Money Tips newsletter, Money Saving Expert stated millions of people can “save £10,000s by overpaying on their mortgage”, but others should save instead. As mortgage rates continue to rise, many people will be wondering if they should use their savings to overpay their mortgage or keep saving.
Overpaying can reduce the amount someone owes on their house because as less interest is compounded, there will be less to pay back.
“The benefit can be huge,” Mr Lewis said.
Britons are encouraged to use MSE’s new Boosted Overpayment Calculator which can help calculate the return on overpaying, versus saving.
For example, the overpayment calculator shows that on a £150,000 mortgage at five percent (25-year term), by overpaying £100 monthly, people would be able to reduce the interest by £23,000.
Mr Lewis explained his “key rule” when deciding what is best.
He said: “KEY RULE: Only overpay if your mortgage rate is higher than the rate you’d earn saving.
“After all, as a simple example, £10,000 in savings at two percent earns £200 for the year, yet use it to overpay a three percent mortgage and it reduces costs by £300 for the year.
“Effectively overpaying is tax-free ‘saving’ at the mortgage rate, so if the rate’s higher than savings (after tax) it wins.”
Once people use the boosted overpayment calculator and see they have money spare to overpay, there are three checks people can make:
- Check other more expensive debts
- Are there any overpayment penalties
- Ensure there is an emergency fund in place
Mortgage rates have been going up for months, but recorded a sharp increase in response to the fall-out from the mini-budget nearly two weeks ago.
First-time buyers and those looking to remortgage are most affected.
An average of at least 100,000 people a month are coming to the end of their current mortgage, and face a significant rise in their monthly repayments.
The typical deal has a rate of 6.07 percent, the financial information service Moneyfacts says – a level not seen since the financial crisis in November 2008.
Rachel Springall from Moneyfacts said: “Borrowers may well be concerned about the rise to fixed mortgage rates but it is essential they seek advice to assess the deals that are available to them right now.
“Fixing for longer may seem more appealing, particularly as both the average two- and five-year fixed rates rise to levels not seen in over a decade.
“Consumers must carefully consider whether now is the right time to buy a home or to wait and see how things change in the coming weeks.”
Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 13 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/
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