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Low rates boost mortgage payments

One third of mortgages taken out since 2005 have been overpaid, with homeowners making a total of £31 billion in extra payments, the Council of Mortgage Lenders (CML) has found.

The lending body said that almost four years of record low interest rates has helped many borrowers to build up larger amounts of equity in their homes – which will also soften the blow for homeowners when rates eventually go back up again.

The trend of homeowners trying to pay down their debt more quickly will also lead to many becoming mortgage-free sooner than they had expected. Half of homeowners overpaying on their mortgage have done so by £5,000 or less – but 10% have overpaid by more than £20,000, the CML said.

The low interest environment has made it more attractive for borrowers to use any spare cash to pay down their debts amid the general mood of consumer caution, as the returns being offered on savings accounts continue to plummet.

In July 2007, the base rate stood at 5.75%, and the typical rate on an outstanding variable rate mortgage was 6.42%.

But as the financial crisis took hold and the Bank of England started aggressively cutting the base rate, many borrowers saw big falls in their interest payments.

In its latest “news and views” publication, the CML said the continued squeeze on household budgets may affect the ability of homeowners to continue to overpay on their loans.

It said: “Rates look set to remain at their current low level for some time yet, meaning there is further potential for mortgage debt to be repaid ahead of schedule.

“That does not necessarily mean that it will be. With household budgets increasingly stretched by a combination of inflation, sluggish wage growth and welfare cuts, more of the ‘windfall’ of lower payments may be drawn upon to meet other household commitments. But overpayments, where they are made, will ease the pressures on household finances.”

The CML said that between April 2005 and March this year, some 2.3 million borrowers had paid off more than their contractual amount.

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