Thousands of homeowners are taking advantage of low interest rates by making monthly overpayments to their mortgage.
Since the Bank of England's decision to cut the base rate by 1.5 percent in November, lenders have received thousands of overpayment requests from customers, making this an increasing trend.
For example, Lloyds TSB received 7,900 requests to set up an overpayment in the first two weeks of January alone. Demand is expected to grow further over the coming months as customers get used to lower monthly payments.
Independent mortgage adviser Hayley Buck: “Most lenders offer at least a 10% overpayment facility. An increasing number of my clients are overpaying on their mortgages, especially as loan to value is now more important than ever. With the lowest mortgage rates only available for up to 75% of the value of the property, borrowers are using their bonus payments and savings to reduce their mortgage balance, thereby qualifying for the lowest rates.”
Win-win solution
There has also been an increase interest in offset mortgage deals says Buck, who has many years experience arranging mortgages for Chiswick properties: “Offset mortgages allow borrowers to place their savings alongside the mortgage which has the same effect as an overpayment, but they have instant access to cash should they need it.
“Rates and fees can be higher but they provide greater flexibility. This is also a very attractive option now that savings rates are very low and clients no longer get a decent return on their cash deposits, by placing them in an offset mortgage they get to reduce their mortgage interest immediately.”
The combination of low interest rates and making overpayments can significantly reduce the term of a mortgage. A customer who took out a variable rate mortgage in 2007, and maintained their payment at the level it was in December 2007, would have already reduced their term by 11.5 years.
