Martin Lewis explains if you should use savings to overpay your mortgage
Martin Lewis has explained if you should use savings to overpay your mortgage as rates continue to rise.
Financial comparison website Moneyfacts.co.uk this week revealed the typical two-year fixed mortgage hit 6% for the first time since December.
It comes off the back of consecutive interest rate rises in a row from the Bank of England which has pushed up mortgage deals for millions of borrowers.
Speaking in the latest MoneySavingExpert.com newsletter, Martin said: “New fixed-rate mortgage deal costs are rising rapidly, as lenders believe UK interest rates may now peak at nearer six than five percent.
“Most have already factored in the Bank of England's likely 13th consecutive rise due this Thursday - the cheapest fixes are roughly 1% point higher than in April (c. £50/mth more per £100,000 mortgage).”
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He continued: “Today I want to look at a question I'm asked a lot: should those with savings use them to reduce their mortgage debt?”
Martin said his first rule is, if your mortgage rate is higher than you can earn in savings, then you could benefit from overpaying.
He used the example of, if you saved £10,000 at 3% this would earn £300 for the year - but if you used the same money to overpay a 5% mortgage it could reduce your costs by £500 over the same period.
Martin then recommended checking the MSE mortgage overpayments calculator to see how much you could save.
For borrowers who still have a cheaper mortgage rate - Martin gave the example of someone with a rate under 2% or 3% - you can likely earn more in top savings.
In this case, the MSE founder recommended not overpaying your mortgage just yet, but instead, putting the money aside until your cheaper fix ends and you go onto a more expensive deal.
There are some cases where you may not want to overpay your mortgage.
Martin gave examples of someone with more expensive priority debts that should be paid off first, or those who haven’t yet built up an emergency fund.
Many lenders let you overpay 10% of your mortgage balance each year, but add penalties above that - so make sure you check this as well.
Finally, MSE founder Martin urged borrowers to make sure the overpayments are put towards reducing the term of their mortgage.
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