Martin Lewis says millions could be ‘better off’ NOT making mortgage overpayments

A mortgage is the largest debt many people will ever have, so common sense would dictate that if you can overpay it, you should. But as Martin Lewis explains in his latest newsletter, this isn’t always the case.

With base rates recently dropping yet again — now down to 3.75% — and many homeowners locked into fixed deals for up to five years, he said ‘it’s a good time for those lucky enough to have savings or spare cash’ to consider overpayment.

By putting extra towards their home loan, some ‘can save £10,000s’ in interest, reduce their loan-to-value percentage to access cheaper future remortgage offers, or cut years off the term to become mortgage-free sooner.

However, according to the Money Saving Expert (MSE) founder, others may be ‘better off’ sticking with their current monthly amount.

It all comes down to where your money works hardest, which means weighing up your mortgage rate against the interest you can earn elsewhere and factoring in other debts and potential penalties.

So before you ramp up that direct debit, weigh up whether any of these four things apply to you — because if they do, overpayment might not be your best option (at least right now, anyway).

You have more expensive debt

If you have any credit cards, loans or overdrafts with a higher interest rate than your mortgage, Martin says it’s ‘generally worth prioritising’ any disposable income to put towards more expensive debts.

‘Do so and the interest doesn’t build up as quickly, saving you cash and giving you more chance of clearing the outstanding balance on your debts earlier,’ explains MSE.

The only caveats to this are student loan debts and 0% credit cards, as they’re slightly more complicated so should be gauged on a case by case basis depending on your specific situation.

You don’t have an emergency fund

‘The fact you’ve overpaid your mortgage doesn’t automatically mean if circumstances change and you suddenly can’t repay, the lender will say “oh, no probs”,’ says consumer finance hero Martin. ‘You’d still be in arrears.’

As such, his ‘rule of thumb’ is to make sure you have enough for a rainy day — or rather a rainy three to six months — in a high-interest, easily-accessible savings account to cover your bills if necessary.

‘Only overpay with any money above that (unless it’s a specific offset mortgage),’ he adds.

You’re on a ‘really cheap’ mortgage rate

The interest you’re paying on your home loan can either be a pro or con in terms of overpayment.

According to MSE, ‘it’s a question of whether overpaying beats the highest-paying savings available’ — and those on ‘older, cheaper mortgages’ are more likely to find the answer is no.

Essentially, if your rate is ‘still really cheap, say 1% or 2%’, Martin claims your extra cash may be ‘better off in top savings’.

However, he also notes: ‘At some point that deal will end and your new mortgage costs will likely be much higher. So you may want to consider having savings available at that point to reduce what you’ll need to borrow.’

Your mortgage has an overpayment penalty

Even if overpaying seems like a good idea, keep in mind your lender may charge a penalty for going over a certain amount — and falling foul of it may end up wiping out the added savings.

This fee is normally between 1% and 5% of any overpayments above 10% of your outstanding balance each year, but this can vary.

Before making any decisions, check your mortgage contract, find out the annual penalty-free limit based on your current balance, then be careful to avoid going over it.

Do you have a story to share?

Get in touch by emailing MetroLifestyleTeam@Metro.co.uk.