This week Natwest announced that it is to double the maximum level of overpayments it will accept to 20% of the outstanding balance from next month.
Brokers welcomed the move, stating it would be particularly valued by a subset of borrowers, but were split on whether the cost of living crisis may mean overpayments are less desirable than was previously the case.
Who do larger overpayments work for?
The option to make larger overpayments are particularly valued by self-employed clients, according to Graham Cox, director of SelfEmployedMortgageHub.com.
He pointed out that many such clients want the ability to overpay as their business profitability improves, and suggested that higher overpayment allowances would be attractive to them.
“With many borrowers on 30 plus year terms, the potential to reduce interest payments and become mortgage free even earlier is a great point of difference in an incredibly competitive mortgage market,” Cox added.
This was echoed by Amit Patel, adviser at Trinity Financial, who pointed to self-employed borrowers as being the likely beneficiaries of the move, as well as those who receive large bonuses.
Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, noted that NatWest joining a “very select” band of lenders with a standard overpayment policy above 10 per cent would put them in the running for clients “looking to overpay substantial amounts”.
He added: “Markets move in cycles, so there will come a time when more people can take advantage of this feature and that will give NatWest an edge over its competitors.”
Lee Flavin, co-founder of Accelerate My Mortgage, added: “This could be significant for people who are looking to exit their fixed rates early, something we have seen a lot over the last 6-12 months. Things have settled somewhat for the moment, but anything can happen, so if it comes round again then doubling that allowance without an ERC essentially helps homeowners looking to do that, since the exit fee they would pay is cut down significantly.”
The role of the cost of living
Some brokers suggested that the appeal of a larger overpayment facility has actually fallen as a result of the recent moves to interest rates.
For example, Ash Ajaz, founder of Focus Finance Solutions, said: “In the current climate where the cost of living is rising in so many areas, people may hold on to their savings instead of making overpayments. The focus should always be to pay off debt with the highest interest first.”
Mark Seddon, director at Fortune Financial Planning, agreed, noting that while overpayments will appeal to those whose monthly income fluctuates from month to month, in some cases it will be best for clients to retain access to their savings, “all the more so amid a cost of living crisis here costs are soaring”.
However, Samuel Ewen, managing director at Rosehill Financial Services, argued that more people would find increased value from overpayments because interest rates have risen.
He explained: “For higher loan amounts, increased rates will have a larger impact in terms of interest payable, potentially making it more appealing to reduce their debt faster. For lower loan amounts, the typical 10 per cent overpayment facility equates to a relatively lower monetary amount, which may make an increased overpayment facility more valuable.”
Will other lenders follow suit?
It was noted by brokers that the vast majority of lenders only permit overpayments of up to 10 per cent of the outstanding balance each month.
However, some suggested that Natwest’s move may push others to review their own overpayment arrangements and explore increasing that cap.
Imran Hussain, director of Harmony Financial Services, said he hoped other big lenders would follow suit, and Anil Mistry, director of RNR Mortgage Solutions agreed, describing the increase as a “visionary step”.
Imogen Sporle, head of property finance at Finanze, suggested that 20 per cent should be the norm anyway.
She explained: “I cannot see any reason why all lenders do not have their overpayment limit at 20 per cent. I think it’s a great idea to help those that have the funds now to save for the long term.”
Offset may be a better option
The move from Natwest was likely to “capture more headlines than clients”, suggested Justin Moy, managing director at EHF Mortgages.
He noted that with rates increasing conversations about overpayments and offset mortgages have both become more common.
“With some sensible pricing, offset mortgages will be more popular, giving the borrower immediate access to cash savings when needed, without the need to re-apply,” he continued.
“Any way to reduce the interest cost will be appreciated, and it’s a positive step by Natwest, but this will be a very niche request.”
