Mortgage holders who are tempted to overpay as they approach the end of their fixed term deal have been urged to instead invest their funds for a better return.
Figures from True Potential show a person with a £495,000 mortgage and a £100,000 lump sum could end up better off by over £42,000 if they chose to invest the amount rather than use it to overpay on their mortgage.
Daniel Harrison, chief executive of True Potential, said: “In times of rising interest rates, it’s understandable that many homeowners feel the urge to overpay on their mortgages to reduce their debt and shield themselves from the shock.
“However, for those fortunate enough to be sitting on a lump sum, it is crucial to carefully assess your financial situation and consider the potential benefits of investing as an alternative.”
The group calculated a person with a mortgage of £495,000 with an annual interest rate of six percent, could overpay with a £100,000 lump sum, to reduce their time to pay off their mortgage to 16 years and three months rather than 25.
But if they chose to invest the £100,000 instead, the amount would grow to £300,252 over the same reduced period, if the stock market returns seven percent on average.
With the boosted funds, they could pay off the rest of the mortgage, which would then be worth £257,771, and still have £42,481 left over.
Another advantage of an individual not overpaying is they will avoid paying a penalty for doing so.
Many mortgage providers charge a fee for overpaying more than 10 percent of the value of a mortgage.
This fee is usually for between one percent and five percent of the amount overpaid, so a £100,000 overpayment could incur costs of between £961 and £4,806, according to True Potential.
Mortgage rates have continually increased as the base interest rate set by the Bank of England has consistently gone up over the past year and a half.
The base rate is currently at five percent with many expecting it could peak at six or seven percent later this year.
Adam French, senior editor at NerdWallet, urged Britons to plan ahead as rates may continue to increase.
He said: “There are no guarantees that rates won’t rise again in the coming months. It’s likely many are doing it already, but budgeting carefully and planning ahead financially remains key.
“Those with a fixed rate mortgage are mercifully protected from rate increases during the fixed-rate period of their mortgage product, but these rate rises are a ticking financial time bomb for the millions due to remortgage over the next couple of years who will likely find the rates on offer are substantially higher than they are used to.”
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