Study shows benefit of overpaying on mortgages

Mon, 28 Nov 2011
 
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Homeowners in the UK could be better off paying down their mortgage debt instead of saving money separately, according to research by first direct .

Based on a £100,000, 25-year mortgage and current average savings and mortgage rates, the online lender found that if borrowers made the minimum repayment on their loan each month and saved £300 a month in a separate savings account over the loan term they would actually be £42,909 worse off once the loan has been paid off.

However, if they put an extra £300 towards their monthly mortgage repayment they could pay the loan off 12 years early, saving £23,903 in the process by repaying £123,084 rather than £146,988 over the 25 years.

If for the remainder of the term they then continue investing the same amount into savings they would have £17,762 more saved up than if they had put aside £300 a month for the 25 years – meaning they would effectively be £41,665 better off at the end of the term.

The research also revealed that people who can afford to overpay the same mortgage by £200 a month could reduce their mortgage term by nine and a half years, and be £33,000 better off at the end than if they had saved separately.

Richard Tolchard, first direct’s senior mortgage product manager, said: "The analysis shows that borrowers are often better off paying down their debt ahead of saving as historically the average rate of interest paid on a mortgage has been consistently higher than the average amount earned by saving ."

"However, that is not to say that we shouldn't save, it is always advisable to have a sum set aside for a rainy day."

"An offset mortgage offers the best of both worlds; offering easy access to your savings while still helping you to reduce the overall interest you pay, and ultimately, the term of the loan," he added.