For the past 18 months, consecutive lockdowns have allowed some consumers to save more than they normally would, and as savings rates remain low, it may be a better option for homeowners to use their savings to pay off a lump sum on their mortgage use than keep in a savings account.
When a mortgage deal is completed, many overpayment lenders still charge a fee when the borrower pays off a lump sum on their mortgage. However, these fees are often not incurred when the deal is over. Therefore, with a lump sum that can be used to repay part of their mortgage, borrowers may find that the best time to make a lump sum repayment is when they sign a new contract.
In addition, a flat rate repayment of a mortgage usually increases the equity the homeowner has in their home, which can result in them being eligible for more competitive mortgage rates. Even if the homeowner cannot make a better deal by adding more home, paying off a lump sum on the mortgage can help reduce monthly repayments.
Take the example above where the homeowner owns a property worth £ 300,000 and has a mortgage of £ 180,000. If that homeowner plans to sign up to 0.84% of the two-year fixed contract and has £ 10,000 in savings to use for a one-time repayment – reducing the mortgage from £ 180,000 to £ 170,000 – they can make their monthly repayments from £ 815.03 to £ 769.75 – a reduction of £ 45.28 per month for a total of £ 1,086.72 over the two year period. If the homeowner stuck the £ 10,000 in the high paying two year fixed rate loan currently from Al Rayan Bank, which pays an expected win rate of 1.76% AER, it would result in him having £ 355.10 in interest over the two earned year – significantly less than the savings that can be made by reducing mortgage repayments.
