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Is now really the time for borrowers to overpay the mortgage? TMA

by: David Copland, director of mortgage services at TMA
  • 13/12/2016
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Is now really the time for borrowers to overpay the mortgage? TMA
For borrowers with surplus income, paying off a mortgage ahead of schedule can be a sensible way to save money on interest payments.

At the same time, with interest rates at rock bottom the prospect for many savers in the UK is bleak.

In fact, it has been widely reported that since the MPC reduced rates to 0.25% and many financial commentators believing they will be low for some time, then now is the time for borrowers to be overpaying their mortgage. This is because as savings rates are lower than mortgage rates you will save money by paying off your debt first. As such, more and more borrowers are looking at the possibility of early repayments.

Unfortunately, it is well known that paying off a mortgage early is not without its difficulties. Therefore, advisers must educate those thinking of overpaying their mortgage today as it is easy to end up paying more than you’ll save in the long run.

First, make sure customers check if the interest rate payments on their mortgage are due daily, monthly, quarterly or annually – ensuring they pay it off a day before the interest is due to avoid entering into the next period of interest owing.

It is also important to make your clients aware that most mortgages only allow a certain amount of capital to be paid off each year. To make matters worse, for anyone eager to pay off their mortgage, early repayment charges are levied against borrowers if more than the capital allowance is repaid.

In addition, once a mortgage has been repaid the money can’t be recouped in an emergency. To this end, an offset mortgage may be an option for a borrower looking to put their savings to use. Offsets allow customers to collateralise their savings against a mortgage, reducing the interest rate payments.

For example, offsetting savings of £50,000 against a mortgage of £200,000 means that the borrower only pays interest on £150,000.Therefore, for a disciplined borrower looking to keep a rainy day fund, an offset mortgage may be the best option.

The fine print of a mortgage can be tricky to navigate, so it’s important to remind borrowers considering overpaying their mortgage that working alongside an adviser is crucial to ensure they understand the precise terms of their mortgage.

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