Study shows benefit of overpaying on mortgages

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.