MARTIN Lewis has revealed whether homeowners should be overpaying on their mortgage.
It comes after the average one-year fixed mortgage topped 6% this week – for the first time in over 14 years, according to MoneyFacts.
In the latest MoneySavingExpert newsletter, Martin Lewis said millions could save £10,000 by paying off their mortgage now – but others still need to save instead.
Martin said: “A year ago you could fix just under 1%, now the cheapest bulk deals are 4.95% for two years, 4.62% for five years and 4.85% for 10 years.
“This 4% rise in mortgage rates equates to around £200 a month more (£2,400 a year) per £100,000 of mortgage debt.”
The rise in mortgage rates comes after the Bank of England warned it could raise interest rates to 6% next year – a warning which meant lenders pulled thousands of fixed-rate mortgages last week.
The central bank issued its warning after the pound plummeted to its lowest level against the dollar since 1971 last Monday – just days after Kwasi Kwarteng presented his mini budget.
And with mortgage rates on the rise, many households are left wondering whether to start overpaying to avoid future bill increases.
Martin Lewis has already explained exactly whether you should dip into your savings to pay off your mortgage.
Martin said households should only overpay on their mortgage if their rate is higher than interest rates on savings.
Martin said: “For example, £10,000 in savings at 2% earns you £200 for the year, but use it to top up a 3% mortgage and it cuts costs by £300 for the year.
“Effectively the overpayment is a tax-free ‘savings’ on the mortgage rate, so if the rate is higher than the savings (after tax), he wins.”
The founder of MoneySavingExpert said households with older fixed mortgages with interest rates below 2% should not be paying more at the moment.
He said: “The highest savings rates are 2.5% for easy access or 4.15% for a year’s fixed. So saving will probably win out.
“If so, put the money aside until your mortgage fix is finished (then it’s also useful to set a deadline for your fixed savings to end) and at that point consider using it to reduce your new, possibly much higher mortgage.” “
Martin said that overpaying in certain cases pays off in the long run because it reduces what you owe and lowers the total interest you’ll pay.
For example, if a household of a £150,000 mortgage at 5% (25-year term), top up £100 a month – you’ll save £23,000 in interest and pay off four years and six months early.
The Sun previously warned households considering overpaying should check what charges they have to pay and pay off more expensive debt first.
Many lenders allow you to pay ten percent of the balance over each year without penalty, and paying that little bit extra can lower your payments and interest.
And before you put money into your mortgage, make sure you’re paying off more expensive debt, such as credit cards, and have enough money set aside to pay three to six months’ worth of essential bills.
We’ve also explained what households should do about their mortgages if their adjustments are coming to an end.