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Mortgage overpayments surge as borrowers fend off rising interest bills

Mortgage borrowers scrambled to pay down their housing debt after interest rates on home loans soared, with lump-sum repayments and redemptions jumping to £2.4bn in October last year from £1.7bn in the same month in 2021.

The figures from industry body UK Finance illustrate the fallout from the government’s “mini” Budget of September 2022, which sparked turmoil on bond markets and caused interest rates on fixed-rate mortgage deals to skyrocket.

Researchers at estate agent Hamptons International estimated the interest savings that these borrowers would have made from paying their debt early. They calculated that overpayments made in October alone would save £1.3bn in interest over the following 12 months, compared with £187mn saved the previous year.

Savings on overpayments were less marked in the latest November figures, with £1.1bn saved over 12 months compared with £247mn in November 2021. But Hamptons said they expected December to show a continuing trend.

Aneisha Beveridge, research director at Hamptons, said borrowers would make savings both by reducing the amount of debt they held and lessening the pain of higher interest rates: “The returns from paying off mortgage debt are significantly higher than they have been at any time over the past decade.” 

Chris Sykes, mortgage consultant at broker Private Finance, said there had been a marked rise in the number of clients overpaying their mortgages in recent months. “It started when fixed rates began creeping up in 2022 but took off when they went up to 4, 5 or 6 per cent after the ‘mini’ Budget.” 

Big lump sum payments can increase a borrower’s proportion of equity in the home, which can also open the door to a range of cheaper fixed-rate mortgage deals.

Loan-to-value bands typically start at between 60 and 75 per cent LTV, with a different rate applying for every 5 percentage point increment above that. Sykes said there were greater savings to be had in paying down to a lower LTV for those who were starting on higher LTVs. “If you’re currently at 70 and you’re paying down to 60 per cent there probably won’t be much of a difference. Paying down from 90 to 85 per cent will give quite a dramatic difference in rates,” he said.

Redemptions — when a borrower pays off their mortgage in full — were typically made by older households with smaller mortgages and higher levels of savings as their fixed-rate deals expired, Hamptons said. Lump-sum overpayments are often made by younger households with larger, higher loan-to-value mortgages — those which will be hit hardest when refinancing following last year’s rate rises.

Mortgage rates have eased back significantly since peaking in October 2022, as stability has returned to the bond markets. Borrowers will pay £1,300 less annually for a two-year fix on a £150,000 loan at 60 per cent loan-to-value than they would have done if refinancing in November, according to L&C Mortgages, a broker.

In spite of expectations that the Bank of England will raise its main interest rate this week, lenders’ appetite for business had sparked a renewed “price war” for new customers, L&C said. Average rates for 2- and 5-year fixes among the top 10 lenders by volume are 1.23 and 1.35 percentage points lower than in November, according to its remortgage tracker.

Standard variable rates at these lenders, meanwhile, are now dearer than the cheapest fixed rates — a reversal of the position in November.

David Hollingworth, associate director at L&C Mortgages, said: “Many [borrowers] may have lost track of how much fixed rates have improved since the pandemonium following the ‘mini’ Budget. Funding conditions have improved and as lenders compete harder for mortgage business a price war has broken out, sending fixed rate costs plummeting. 

“That said, rates remain higher than the lows of recent years and those coming towards the end of a fixed deal will need to plan ahead.”

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