14th November 2023 – Written by mortgagebrain
by Katie Thompson
National Account Manager, Mortgage Brain
With the significant rise in mortgage rates over the last 12 – 18 months, customers are looking for ways to reduce the size of their mortgage to benefit from lower interest rates and monthly payments.
This is easier to achieve now that some mortgage lenders recently increased the percentage amount that a customer can overpay annually from an average of 10% up to 20%, in some cases. A quick search on Sourcing Brain reveals most lenders currently offer the ability to overpay on residential mortgages.
Q4 of 2022 saw the highest quarterly figure on record for mortgage overpayments of £6.7bn in the wake of the mini-budget[1].
Sourcing Brain has the added functionality for mortgage brokers to demonstrate the positive impact any overpayment can make by using the in-built ‘Graphing’ feature. Your customer may have a lump sum, perhaps from an inheritance, or they’re expecting a pay increase, which they can put towards a monthly overpayment. Whichever it is, you can visualise the impact this will have on their mortgage for them. Check out the feature on my ‘how to’ video.
A further consideration could be if customers are looking for a particular feature within their mortgage, for example, Offset. We have seen consumer choice for this type of product decline over the years but, by using the Graphing tool, brokers can demonstrate to a customer that they can still achieve their potential goal of reducing the term but by using a method such as Offset.
As a mortgage broker, advising your clients to overpay on their mortgage can have several benefits, both for your clients and for your professional relationship:
Interest savings
One of the primary advantages is the reduction of interest costs over the life of the loan. By paying extra each month, your client can significantly decrease the amount of interest paid, leading to substantial long-term savings.
Take the example of a mortgage of £250,000 with 21 years left to run and a current interest rate of 4.64% a year (SVR at 8.50%). At the moment, monthly repayments would be £1,697. But by paying an extra £100 a month, if the monthly payments remained the same, the term of the mortgage would be reduced by 12 months, saving a total of £19,099 in interest – assuming that the 4.64% remained in force for the duration of the loan.
Faster loan repayment
Overpaying accelerates the pace at which your client pays off their mortgage, helping them to become debt-free sooner and giving them greater financial freedom.
Equity buildup
Overpayments increase the equity of your client’s home more rapidly. This can be particularly valuable if they plan to use the equity for future investments, renovations, or as a safety net in case of financial difficulties.
Improved credit score
Consistent overpayments demonstrate responsible financial management, potentially boosting your client’s credit score.
Security in economic downturns
If your client faces economic difficulties, having a mortgage with a lower outstanding balance due to overpayments can provide them with a financial cushion so they’re better prepared to weather unexpected financial challenges.
Psychological benefits
Being mortgage-free sooner can bring a sense of accomplishment and relief. It eliminates one of the most significant financial obligations and can improve your clients’ overall financial well-being.
It’s important to take a balanced view on the overpayment of a client’s mortgage. It may not be right for everyone. Now more than ever, with Consumer Duty, it’s essential to consider other factors such as any other debt, pension pots, and a lack of access to these funds if needed. What’s best for your client?
This can be an attractive selling point and demonstrate your commitment to their financial well-being.
Client satisfaction
Helping clients save money and achieve their financial goals, such as paying off their mortgage faster, can lead to greater client satisfaction.
Differentiation
Advising clients on the benefits of overpaying can differentiate you from other mortgage advisers. It shows that you go the extra mile to provide comprehensive financial advice and support, not just facilitate mortgage transactions.
Long-term client relationships
By helping clients make informed financial decisions, you’re more likely to build long-lasting relationships. These relationships can lead to repeat business and referrals.
Professional trust
Providing holistic financial advice, including mortgage overpayments, can enhance the trust your clients have in your expertise. They’ll see you as a trusted adviser, not just a transaction facilitator.
Compliance
Under the new Consumer Duty regulations, mortgage advisers must act in good faith towards customers, avoid causing them foreseeable harm, and enable and support them to pursue their financial objectives.
Risk mitigation
By encouraging responsible financial management, you can help clients avoid financial distress in the future. This reduces the risk of clients defaulting on their mortgage, which can be beneficial for both the client and the lender.
The Graphing tool in Sourcing Brain allows you to customise your advice on overpayments to each client’s unique financial situation and goals. By offering this valuable guidance, you demonstrate that you truly care about your clients’ financial well-being, ultimately leading to better client outcomes and a boost in your reputation.
For a quick ‘how to’ on our Graphing tool, check out my video. If you’re not yet a Sourcing Brain user you can get a free 30-day trial.
