Fixed rate mortgage payers could save around £5,895 and reduce their term by over three years by making overpayments on their loan, new research suggests.
However, some 56% of homeowners pay thousands of pounds in interest unnecessarily by only paying the agreed minimum amount each month, whereas small but frequent overpayments can reduce the mortgage term significantly, according to the research from Comparethemarket.
The figures show that those on a fixed rate repayment mortgage could save £5,895 and reduce their term by three years and two months by overpaying an extra £100 a month.
Potential savings for first time buyers on a fixed rate are even greater. Overpaying by £100 each month could take two years off the mortgage term and cut the overall amount of interest paid by £6,129.
Meanwhile, those on a standard variable rate mortgage (SVR) are likely to be paying a higher interest rate and stand to make even higher savings as a result of overpaying. The research shows that small, regular overpayments can reduce the total amount paid by around £13,000, and can see the mortgage paid three years and four months sooner.
Mortgage holders on SVRs are likely to be paying over the odds due to higher interest rates, but they have the option of switching to a fixed rate and using the extra funds to overpay.
The research also asked participants about any lifestyle changes that they had made in order to be able to make larger overpayments, and found that almost one in five have sacrificed overseas holidays, while 12% delayed buying a new car and 21% put off buying luxury items such as expensive clothes or gadgets like an iPad.
While these sacrifices may seem relatively small, some 56% of those who have overpaid feel more financially secure as a result. However, 55% say that they could not possibly afford to overpay, while 33% say that other outgoings prevent them from doing so. Additionally, 54% of respondents feel discouraged to make overpayments because of potential financial penalties.
‘Even though committing more towards your mortgage can seem financially daunting, even modest but regular overpayments can save you thousands in the long run. Households on standard variable rates are likely to be paying higher interest rates and have more expensive monthly mortgage commitments,’ said Mark Gordon, director of mortgages at comparethemarket.
‘If you are on an SVR, instead of overpaying on your mortgage it may be wise to switch to a fixed rate product which is always cheaper. You can then use that extra money to make overpayments and reduce your term even further to avoid paying unnecessary sums in interest,’ he added.