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Making Mortgage Overpayments While Debt Is Cheap

Written by The Landlord on 11 Dec 2008

For the last few years I’ve been repaying my mortgage while borrowing has been uncomfortably expensive. I imagine it’s been the same for most people. However, now that interest rates have come tumbling down, like your Nan’s breasts on her 60th Birthday, debt is starting to get a little bit cheaper.

Example

The interest rate on my repayment mortgage was 5.59%, on a 140k loan amount. My repayment on that was £877.39 pcm. Interest was £652.16. I was only paying off £225.23 pcm out of £877.39 pcm.

Due to the base rate cuts, my Standard Variable Rate (SVR) has dropped to 3.09%, consequently my repayments have gone down to £676.72. The interest I’m paying for month has gone down to £451pcm. Huge difference- it’s apparent how much cheaper borrowing has become.

I’m going to maximize on this by continuing to pay the same amount I always have been- £877.39 pcm. I’ll approximately be overpaying by £200 pcm.

The result

Without overpayment:
Time to pay off mortgage: 24 years, 6 months
Total interest I’ll pay: £58,827.85

With overpayment:
Time to pay off mortgage: 17 years, 2 months
Total interest I’ll pay: £39,768.61

(Calculations are indicative only. The actual amount saved will vary)

Massive difference, right?
Obviously it won’t pan out like that because when the property market picks up, interest rates will rise once again. However, for now, you can see the perks of making overpayments while debt is relative cheap(er).

Ultimately, I’ll be building equity a lot quicker than planned, and while house prices are slowly tumbling, that can’t be a bad thing. I know a lot of people are looking at the short term picture and thinking that lower rates mean extra short-term money in the pocket. But think about the bigger picture…it’s a lot more fruitful.

I can afford to continue paying the same rates as I always have been, so that’s exactly what I’m going to do…