Martin Lewis cautions people from overpaying on their mortgage as interest rates rise.
As interest rates rise, Martin Lewis has issued a warning to homeowners about paying too much for their mortgage.
In the most recent email, The MoneySavingExpert (MSE) himself urged homeowners to think about utilising extra savings to pay off their mortgages early.
Martin emphasised that you can end up saving thousands of pounds by doing this.
He wrote: “New fixed-rate mortgage agreement costs are growing swiftly, as lenders estimate UK interest rates may now peak at closer to 6% than 5%, before the Bank of England increased rates last Thursday to 5%.
The cheapest fixes are about 1% point more than in April (about £50/mth more per £100,000 mortgage), as most have already taken into account the Bank of England’s projected 13th consecutive rise due this Thursday.
He continued by saying that while some people lack the opportunity to overpay because they do not have enough savings, millions of people have.
The consumer advocate went on to say that there are a number of considerations to make before choosing something.
According to Martin, you may gain from overpaying if your mortgage rate is higher than the return on your savings.
For instance, if you saved £10,000 at 3%, you would make £300 over the course of a year. However, if you utilised that same amount to pay your mortgage off early at 5%, you could save £500 over the course of the same period of time.
Martin’s second piece of advice is to figure out how much you could save by using the MSE Mortgage Overpayment Calculator.
Martin advises saving rather than overpaying for borrowers who are still on an older, more affordable fixed mortgage rate, but having the money set aside for when the fix expires.
He used the example of a person with a rate below 2% or 3%, saying that you could probably make more money from top savings.
They could save the money until their fix is over, at which point they might think about applying it to paying off their new mortgage, which is probably going to have a much higher rate.
In other circumstances, such as when you have more expensive priority debt that you should prioritise first, you may not want to overpay your mortgage.
Martin added that individuals who haven’t yet started saving for emergencies would not want to overspend either.
It’s crucial to keep in mind that lenders only allow you to overpay your mortgage by 10% per year without incurring penalties. Make sure you confirm this with your lender before making a choice.
Martin also advised customers to make sure that the excess funds were applied to shortening the duration of their mortgage rather than just lowering their monthly payments going forward.
He said that paying down your home debt can result in a better refinancing bargain in the future.
If your loan-to-value (LTV) is over 60%, lowering it could result in better bargains. LTV is the percentage of the current worth of your house that you are borrowing.
Martin said there are thresholds where it becomes less expensive, often 90%, 80%, 75%, and 60%.
Therefore, it may be advantageous if paying more than you should in order to lower your debt beyond a certain point.
Before making any decisions, be sure to speak with your lender and determine whether it’s the best course of action for you using mortgage overpayment calculators.