Financial guru Martin Lewis has explained if you should overpay your mortgage as rates continue to go up.
The mortgage market was thrown into turmoil last week, after the Mini-Budget saw more than 1,000 deals pulled – meaning less choice for borrowers. Analysts began to predict that the Bank of England could be forced to raise the base interest rate to six per cent next summer.
However, after the Chancellor announced a U-turn on axing the top tier 45% income tax rate for the most wealthy, that forecast fell slightly to 5.5%. But mortgage rates are still rising. One year ago, the cheapest fix was 0.89% – now the best deals are 4.82% for a two-year fix.
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In the latest MoneySavingExpert newsletter, Martin explained what this means for those who have savings, and are considering paying more on their mortgage to clear it quicker. The MSE founder said his “key rule” is to only overpay if your mortgage rate is higher than the rate you’d earn by putting your money in a savings account.
The top savings rates at the moment are 2.5% easy-access from Yorkshire Building Society or 4.2% for a one-year fixed account from Secure Trust Bank. “As a simple example, £10,000 in savings at 2% earns £200 for the year, yet use it to overpay a 3% mortgage and it reduces costs by £300 for the year,” said Martin.
“Effectively overpaying is tax-free ‘saving’ at the mortgage rate, so if the rate’s higher than savings (after tax) it wins.”
Those who have recently re-mortgaged will be paying a much more expensive rate compared to a year ago – and this is likely to be higher than savings rates, reports The Mirror. Martin explained it is these borrowers who will most probably benefit from overpaying their mortgage now.
For older fixes where your rate is likely still cheap, Martin suggested putting your money away into a top-paying savings account until your mortgage ends. “At that point, consider using it towards reducing your new likely-much-higher-rate mortgage,” he said.
If it looks like you should overpay, Martin advised that you first check if you have other debts that need clearing first – particularly priority debts and one with expensive interest rates. You also need to see if your mortgage lender charges overpayment penalties – most let you overpay 10% of your mortgage balance each year – and make sure it is your term that is being reduced.
Finally, make sure you have an emergency fund in case something happens – for example, an unexpected job loss, or the car breaks down.
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