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Borrowers look to penalty-free mortgages as overpayment desire grows – analysis

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  • 20/09/2023
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Borrowers look to penalty-free mortgages as overpayment desire grows – analysis
Some advisers have noted a trend in borrowers either looking to make significant overpayments on their mortgages or find ways to make this possible in the future so they can reduce or be free from their debt.

Greg Cunnington, chief operating officer of LDN Finance, said the firm was “definitely seeing a trend” of people wanting to overpay their mortgages, adding that these were sometimes “significant sums”. 

According to Cunnington, the percentage of applications that the firm has advised on with no early repayment penalties has “more than doubled this year”. 

He said borrowers were looking to “take advantage of overpaying, or the opportunity to overpay, when possible”. 

“When mortgage rates began with a one, or even a zero, cash rich clients would often still obtain higher than required mortgage finance to exploit this; but with rates now higher, these clients are looking to pay these loans down where they can,” Cunnington added. 

Dee Ganesharajah, partner at Mesa Financial, who works primarily with high-net-worth individuals also noted a trend among those with more financial legroom.  

She said it was no longer the case that “money was cheap” and as a result, borrowers were wanting to “pay large amounts off their mortgage” which was sometimes more than the typical 10 per cent annual allowance. 

“So, when reviewing the re-financing options, one of the most common client priorities has been to be able to make large overpayments, normally with bonuses, maturing investments etc. Also, this has surprisingly outweighed the need for the lowest rate,” Ganesharajah added. 

 

Exploring other avenues 

Cunnington and Ganesharajah said offset mortgages could be a suitable consideration in this scenario. 

Cunnington said LDN Finance was witnessing an “uplift” in clients wanting to put their money into offsetting the mortgage while maintaining the flexibility to access this feature in the future while hoping rates would decline in the future. 

“It is a shame more lenders are not in this space as offset has become a great option once more for the right clients,” he added. 

Ganesharajah said advisers needed to be “savvy” by looking at offset mortgages, shorter initial terms, and lenders that allow larger overpayments and tracker rates. She however noted that many lenders had capped the overpayment allowance on tracker mortgages. 

She said these alternatives could allow “clients to have lower monthly payments and to be able to budget more comfortably, especially when looking are larger borrowing amounts, especially as the general cost of living has increased, which clients do not have control over”. 

Ganesharajah advised that such action had to be weighed up against the possibility of earning more on savings or the inheritance tax advantages open to older borrowers by retaining debt. 

 

Reaching financial freedom 

Niamh Byrne, head of mortgages at Financial Advice Centre, said her firm had not noticed a growing trend or appetite to make significant overpayments but most clients with surplus income or cash were using their money to save and gain on the interest or pay off other bills. 

The firm does encourage clients to consider making overpayments as Byrne added that “repaying mortgage debt is often paramount to achieving financial freedom”. 

She also said the decision from some lenders to raise the overpayment allowance from 10 per cent to 20 per cent indicated an appetite to support people in reducing their mortgage debt. 

Bryne continued: “Whilst all clients have different individual needs, I think it’s a fair assumption to make that all borrowers strive for financial freedom and security of owning their property without a lending charge. It’s our responsibility to identify and prioritise immediate and long-term needs, whilst being ever conscious of affordability and other financial objectives alongside mortgage repayment.  

“Particularly in the current climate, I can appreciate the need to ringfence savings and ‘rainy day funds’ and would hope that whilst significant reductions to mortgage debt may not be possible presently, that as markets settle, we will see a bigger uptake in debt reduction.” 

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