Beat the interest rate hike by overpaying loans now

Borrowers should consider making additional capital repayments of their home loans while interest rates remain low, say mortgage brokers – with one high street lender now allowing customers to overpay by as much as 50 per cent.

The Co-operative Bank and its sister lender Britannia this week launched a new capital repayments scheme which allows its mortgage borrowers – including those on variable rate and fixed-rate deals – to make additional capital repayments of up to 50 per cent of the outstanding balance without penalty.

Overpaying on a mortgage can reduce the total interest payable by tens of thousands of pounds and cut years off the term of a loan. However, the window of opportunity to overpay may not last much longer, mortgage brokers warn.

Inflation figures published on Tuesday showed that last month inflation jumped to its highest level in eight months , adding pressure on the Bank of England to raise interest rates. Homeowners have enjoyed historically low mortgage costs since the base rate fell to 0.5 per cent in 2009.

Most lenders will let borrowers overpay by up to 10 per cent of their mortgage amount each year. Customers on lifetime trackers and standard variable rates have no restrictions on the amount they can overpay.

But over the past 18 months, a number of lenders have increased the amount of capital that can be repaid without penalty.

Halifax, Cheltenham & Gloucester and BM Solutions, all part of Lloyds Banking Group, allow customers to overpay up to 20 per cent of their loan balance. This offer ends on March 31 and is only available on variable-rate deals, says Mark Harris of Savills Private Finance.

Stroud & Swindon allows customers to overpay up to 25 per cent of the outstanding mortgage, while HSBC will allow up to 20 per cent of the borrower’s monthly payment. Nationwide allows customers to overpay by up to £500 a month.

“The Co-op and Britannia’s offer will appeal to borrowers who have savings earning poor rates of interest, who would rather make their money work harder by clearing their mortgage more quickly,” says Melanie Bien, director of Private Finance.

A Co-op customer with a £300,000 mortgage at a rate of 4.24 per cent over a 25- year term could save as much as £155,000 on the total cost of the loan and reduce the life of the mortgage to just nine years by making an overpayment of 50 per cent.

David Hollingworth of London & Country, the mortgage broker, says paying a greater slice of the mortgage each year can also reduce the loan-to-value on the property – potentially allowing a borrower to access more competitive lending rates.

But brokers warn that borrowers should not use cash they may need at a later date as not all mortgages allow holders to withdraw any overpayments later. For example, repayments made as part of Co-op’s scheme are seen as a permanent reduction in the capital outstanding.

Wealthy borrowers will frequently make lump sum overpayments on their mortgage when they receive their annual bonus, profit distributions or dividends – and, as a result, most private banks do not charge penalties on their variable rate loans. However, some do charge penalties on their fixed-rate loans.

“For those that want to have a fixed rate and make overpayments, we will often combine deals for our clients – putting the amount that the client expects to overpay on a penalty-free tracker and the rest on the fixed rate,” says Nigel Bedford of Largemortgageloans.com.