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Could you save by overpaying on the mortgage?

Monday, 28 November 2011 9:54 AM

Overpaying on your mortgage rather than saving money separately can save you tens of thousands of pounds, according to research by first direct.

The bank calculates that someone with a £100,000 mortgage who overpays an extra £300 a month would be almost £42,000 better off than if they had put the same amount into a savings account.

The £300 would be added to the monthly mortgage payment of £489.96 and the mortgage would be paid off 12 years early, and cost a total of £123,084 over the first 13 years. Saving the whole £789.96 a month for the remaining 12 years would generate £121,840, leaving the total cost at £1,244.19.

In contrast, paying £489.96 a month for 25 years would cost £146,988. Saving £300 a month for 25 years would generate £104,079. So the total cost would be far more at £42,909.

Using the same analysis, someone who could afford to overpay on the mortgage by £200 a month would shave nine years and six months off the loan and be £33,000 better off than if they had saved separately.

Richard Tolchard, senior mortgage product manager at first direct, said: "An offset mortgage offers the best of both worlds; offering easy access to your savings while still helping you to reduce the overall interest you pay, and ultimately, the term of the loan."

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