Overpaying may help when you come to remortgage
Borrowers with more equity in their property may be able to secure a better rate when they come to remortgage.
“Overpaying isn’t necessarily going to be looked at more favourably by a lender as they will always want to see that the mortgage is affordable,” said Mr Hollingworth.
“But it could reduce the loan-to-value (LTV) on the mortgage, which could open up a broader range of better rates. And a smaller mortgage should also mean that affordability is easier to meet – which again could help to open up the best choice of rates.”
For example, the best two-year fixed remortgage deal with a loan worth 60pc of a home’s value was 4.39pc as of May 30, compared with 4.48pc for a loan of 75pc, and 4.64pc for a loan of 80pc, according to L&C Mortgages.
Now read: Fixed-rate mortgage or tracker? How to tackle rising interest rates
Should you invest instead?
If other debt, retirement pots and emergency savings are in a good place, you may find yourself weighing up the benefit of investing versus paying down mortgage debt.
You certainly don’t need to pay out huge amounts to do either: regular investing at £100 a month over five years with average returns of 4.5pc equates to £6,590 (investment growth of £592.20). If you achieve 7.5pc returns, the balance rises to £7,110 (investment growth of £1,105). Both of these examples assume charges of 0.75pc a year.
Alternatively, using that same £100 a month to overpay a mortgage. Doing this for five years on the typical five-year fixed rate of 5.05pc (as of May 30, according to Moneyfacts) on a £300,000 mortgage (25-year term) would reduce the mortgage by £6,809.
If you then maintained normal payment levels you would save a total of £12,290 in interest over the life of the mortgage and reduce your loan term by nine months.
On paper, it makes sense to invest your cash if you think you’re going to make a return that’s going to be higher than the interest you’re paying on your mortgage.
But with mortgage rates edging north of 5pc – with scope to go higher if the Bank Rate fails to fall in line with predictions – then any investment will have to work pretty hard to provide a net return in excess of that.
