Last week’s news that the Bank of England was to reduce the base rate to 4.25% will have provided some cheer to many would-be house buyers as they look to take out a mortgage.
Lower interest rates will increase the borrowing power of some but, as we learned last month, the average age of first-time buyers is getting older, with so-called ‘rentflation’ and rising bills making it ever harder to get a foot on the property ladder.
It's not just good news for would-be house buyers, but also for some mortgage holders with a rate that’s coming up for renewal. For example, those who took out a two-year fix in the summer of 2023, did so when the base rate was a full percentage point higher at 5.25%, meaning they can be hopeful of a lower monthly cost when their repayment is renegotiated.
More encouragingly, for both those who are looking to buy and those eyeing up a lower monthly payment, the cut is not expected to be the last of 2025.
In April’s Property Insights, new data published showed that spending on rent and mortgages increased 5.2 per cent year-on-year. While this is a slight drop from the 5.4 per cent figure seen in March, it still represents a significant hike in spending for renters and homeowners. And, as research shows, many are taking evasive action as they work to become mortgage-free.
One in four are overpaying
In an effort to reduce the impact of mortgages, one in four (23 per cent) mortgage holders have told us that they are actively making overpayments.
These overpayments are substantial too, averaging out at £221 per month. That’s on top of their regular repayments and works out to £2,647 per year. Those who are overpaying predict that this will reduce their mortgage term by four years on average.
Speaking about this, Jatin Patel, Head of Mortgages, Savings and Insurance at Barclays, said: “For mortgage holders fortunate enough to be able to make overpayments, it can be a great way to reduce the length of your loan term, or minimise the impact of possible rate shocks coming after a lower fixed deal.”
As he explains below, making small overpayments towards a mortgage can pay in the long-term, but, for many mortgage holders, the decision to overpay needs to be weighed against a number of other factors.
Overpaying on mortgages: Four factors to consider
1. Weigh up your options
“Although the thought of paying a mortgage off earlier may be appealing, it’s important to balance the opportunity with other debts and savings."
"Before thinking about overpaying your mortgage, you should first pay down other high-interest debts, like credit cards or overdrafts, as well as build up a rainy-day savings fund, in case of any unexpected expenses.”
2. Pay now, save later
“As you’re charged interest on the balance of your loan, it can often feel like your outstanding balance is reducing fairly slowly. But, by making overpayments, whether this is monthly or through lump-sums, you can directly chip away at the original amount borrowed."
"As a result, you are charged less interest, which over the full term, can add up to a significant saving.”
3. Shave off time
“The benefit of overpaying doesn’t stop at reducing how much interest is paid, it also provides an opportunity to pay off your mortgage faster than your agreed term."
"Our research found that consumers who overpay anticipate paying off their mortgage on average four years earlier than if they simply made their contractual monthly payment."
"However, if you make a lump-sum payment, it’s important to remember you might have to pay a charge. This is called an 'early repayment charge', and your mortgage offer letter would explain when this applies.”
4. Pay flexibly
“One of the benefits of overpaying is that homeowners can set the pace. At Barclays, customers can make payments on their mortgage through various methods at any point throughout the month."
"As long as that CMP is paid in full by the due date, we also have no limits on frequency – so you can pay how and when it suits you best. So it’s always worth checking with your lender to see what works for you.”
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