According to Andrew Frankish, Technical Director at Mortgage Talk, the North
's largest mortgage broker, the ability to make overpayments - or lump sum
contributions to your mortgage - is a facility that more and more homebuyers
are requesting.
But, is this a genuinely useful feature, or just a gimmick
that lenders are using to attract borrowers to their products?
'In the right circumstances, overpayments are an excellent way of reducing
the capital outstanding, and time remaining on your mortgage,' states
Frankish. 'If a borrower has no other debts, and a reasonable amount of free
income, overpaying will reduce the total amount of interest that is paid, as
well as shortening the mortgage term. However, if the borrower has other
debts, or a limited income, then we tend to advise clients to consider
offsetting instead.'
'The reason for this is that, as mortgage interest rates are at a forty year
low, borrowers will be paying greater levels of interest on their other
loans. As such, it is prudent to try and reduce these to a minimum, before
applying spare funds to the mortgage debt,' he warns.
'In addition, once you have overpaid on a mortgage, it is impossible to get
this money back from the lender, without applying for a further advance. So,
if you need to raise capital for whatever reason, you either have to take
out a personal loan, which is expensive, or remortgage to release some
equity from your property. Offsetting enables the borrower to place funds in
a parallel account, which can then be applied as appropriate to reduce the
size of the mortgage debt,' adds Frankish.
'At the moment, the ability to make overpayments is something that many
lenders are promoting as an integral part of their products. A lot of
lenders, such as the Northern Rock, allow borrowers to redeem ten to fifteen
percent of the outstanding capital in any one year, without penalty,' he
advises.
'However, our advice to clients is that, unless they see themselves in
circumstances where they anticipate making regular overpayments, don't
choose an otherwise mediocre product based solely on the ability to overpay.
This is especially true in the first time buyer market, where borrowers
would be wise to select a good fixed rate or discounted scheme that will
help them get onto the property ladder, rather than selecting a product just
for an overpayment facility and nothing else.'
'In his recent budget, the Chancellor announced an initiative to look at
long term fixed rate loans, similar to the US market. Here, we regard an
ability to overpay as an essential precursor to recommending such products.
We would be uncomfortable in suggesting that borrowers tie themselves into a
ten or fifteen year commitment without the ability to increase payments over
time, or make a lump sum contribution that would help them pay off their
mortgage early,' concludes Frankish.
