Martin Lewis has shared new advice for homeowners after sharing that he has been inundated with queries about mortgages since the Bank of England raised interest rates to 2.25% from 1.75% - the highest level since November 2008 - describing the mortgage market as being in “turmoil”.
Writing in the latest edition of the MoneySavingExpert.com (MSE.com) newsletter, the consumer champion focuses on whether homeowners with savings should use their savings to bring their mortgage debt down, something he has been asked about many times recently. The financial guru looks at those on new mortgages and older fixes, but more importantly shares his ‘key rule’ if you’re considering overpaying your mortgage.
Martin explained how “the mortgage market turmoil continues” and that a year ago you could fix at just under 1%, but this has now jumped to nearly 5% for a two-year fixed deal (4.82%) - a rise of more than 3% which equates to around £150 more each month.
He continued: “I want to focus on a specific issue many are asking me about. Should those still with savings use them to reduce their mortgage debt?”
Explaining his key rule, Martin said: “Only overpay if your mortgage rate is higher than the rate you'd earn saving.
“As a simple example, £10,000 in savings at 2% earns £200 for the year, yet use it to overpay a 3% mortgage and it reduces costs by £300 for the year. Effectively overpaying is tax-free 'saving' at the mortgage rate, so if the rate's higher than savings (after tax) it wins.”
Martin also explained that for those who have recently taken on a mortgage, the benefit of overpaying is “most likely”, but it gets a bit more complicated for people with an older mortgage fix.
He said: “Your rate is likely still cheap, possibly below 2%, while the top savings rates are 2.5% easy-access or 4.2% for a year's fix. So, saving is likely to win.”
His advice is to put the money away until your mortgage fix ends and then consider using it to reduce anticipated higher monthly repayments.
Martin added: “Reducing your mortgage size can get you a better deal. Overpaying might mean you drop a loan-to-value band when you next remortgage - as it reduces the proportion of your home's current value you're borrowing.”
Three checks to consider before overpaying mortgage
Full details on this can be found on MSE.com here.
Martin advises anyone considering overpaying their mortgage to consider the following:
- If you have other debts which are more expensive than your mortgage then prioritise clearing them
- Make sure your lender does not charge any overpayment penalties
- Ensure you have an emergency fund of at least six month’s worth of bills money saved as you never know what the future holds
Martin also warned people to make sure their lender reduces the term and not the repayments.
He said: “Ask your lender to ensure each overpayment reduces your mortgage term. Some instead just lower your future repayments, and keep you paying over the same period, so there's no interest gain.”
You can read Martin’s full advice on MSE.com here.
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