Borrowers who can afford higher monthly mortgage repayments, brought on by last year's interest rate rises, should consider continuing to pay off the same amount to shrink their mortgage, says mortgage broker John Charcol.
Borrowers who maintain their repayments at last year’s high point could pay off their mortgage two years early following two rate cuts in the past few months.
Katie Tucker, technical manager at Charcol.co.uk, says: “For many people, the mortgage is what dictates when you can retire. By paying it off even a few years early it can make a difference to your quality of life not only because of age, but because of the money you free up to spend on other things.”
She says borrowers on variable rates will have seen their monthly repayments on a £100,000 mortgage increase from an average of £555 to £629 as a result of five base rate rises in the past two years.
Borrowers who can afford the higher payments should keep them at that level, according to Tucker, because the additional payments will pay off the mortgage capital, reducing the term of the mortgage.
A borrower with a £100,000 mortgage who kept their payments at the 5.75% rate would pay around £30 a month extra compared with today’s rate of 5.25%, which could pay off their mortgage two years early.
Furthermore, if rates fell to 4.5% in the future, maintaining payments at 5.75% could cut five years from a 25-year mortgage term.
Tucker adds: “Making this little overpayment reduces your capital, and with property value rumoured to be falling in many places this year, repaying debt is the must-do for 2008 to minimise any risk of negative equity.
“Most lenders allow you to overpay between £500 and 10% of the outstanding debt extra, without charge, each month; you simply write a cheque to yourself, or set up a standing order, and let them know you want it to goes towards reducing your capital debt.”
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