Mortgages: Homeowners could save £18,000 by paying a little more

In October, the average two-year fix rocketed to a 14-year high of 6.65 per cent, with five-year deals reaching 6.51 per cent in the same month.

Rates have since fallen, but they are still much higher than pre-pandemic levels.

According to the Equity Release Council (ERC), in the last three months of 2022, homeowners made £23.3billion of mortgage overpayments, equivalent to £64million per day.

A homeowner with a mortgage rate of four per cent could save more than £18,000 in interest over the span of their loan by overpaying just £100 a month.

Based on a £200,000, 25-year repayment mortgage, they would be able to repay the debt three years and four months early.

Jim Boyd, chief executive officer at the Equity Release Council, said: “Growing mortgage debt means more people will be making repayments into their retirement, when most would prefer to be mortgage-free.

“This comes at a time when the cost of living crisis has added almost 20 per cent to the ‘minimum’ cost of retirement, with many pensioners’ average income leaving them short of a moderate or even minimum level of comfort.”

Most lenders will allow homeowners to overpay 10 per cent of their mortgage each year, while trackers, which follow the base rate and offset mortgages, typically allow people to overpay by as much as they like.

David Hollingworth, associate director at L&C Mortgages, said it made sense for borrowers to overpay their mortgages if they could.

He said: “Although many homeowners will be focused on making ends meet as they deal with the higher cost of living and interest rates, some will be putting any savings they may have built up during the pandemic to work to reduce their debt.

“Those that are still enjoying a low fixed rate may want to make the most of it by saving regularly or overpaying to help reduce their mortgage ahead of the end of their fixed deal.”

Those considering overpaying on their mortgages should be aware they may face overpayment penalties from some lenders and that even those that allow overpayments may give borrowers a penalty for overpaying more than they permit.

Penalties could range from one per cent to five per cent of the sum you have overpaid.

Experts advise that homeowners consider whether they should prioritise clearing other forms of debt with higher interest rates before tackling their mortgage as they have typically lower interest rates than credit cards.