Scots slashing mortgage debts while interest rates stay low

ALMOST a third of Edinburgh mortgage holders are making overpayments to reduce their debts while the cost of borrowing is low, according to figures published today.

Research by Lloyds Banking Group found that 32 per cent of mortgage customers in the capital and 24 per cent in Glasgow were making overpayments. Three-quarters of those in Edinburgh and 56 per cent in Glasgow said they were doing so in a bid to reduce their mortgage term while interest rates were at historic lows.

Millions of homeowners have maintained repayments at the levels set prior to a series of Bank of England base rate reductions in the six months to last March that culminated in an all-time low of 0.5 per cent. The rate has remained unchanged over the past year and is considered unlikely to rise in the coming months, allowing homeowners on tracker and standard variable rate mortgages to pay down larger chunks of their outstanding balance.

In all, about a quarter of UK mortgage holders are overpaying their mortgages. Almost half are doing so to reduce the term of their mortgage, while 22 per cent said they were overpaying so they would fork out less interest over the term of the mortgage.

However, many of Lloyds' mortgage holders are opting against overpayments. Four in ten Lloyds variable rate mortgage customers in Glasgow and half in Edinburgh said they were not overpaying because they needed the money for living costs.

Most lenders allow customers to overpay only by up to 10 per cent or up to a specific monthly sum before early repayment charges of between 2 and 5 per cent are levied.

But some borrowers are losing out on interest savings because their lender calculates interest only once a year. This means overpayments made the day after the interest is set are not deducted from the mortgage balance for another year and borrowers do not benefit from an immediate reduction in the amount of interest repayments needed. Dunfermline Building Society is among the lenders calculating interest only once a year, but most lenders do so on a daily or monthly basis.

Lloyds will announce today that it is doubling the amount by which tracker mortgage customers can overpay to 20 per cent without penalty. The allowance will be in place until 31 March, 2011. Borrowers overpaying a 100,000 mortgage with a variable rate of 3.5 per cent by 50 a month can trim their overall repayment term by three years and six months and save 14,576.

Stephen Noakes, commercial director of mortgages at Lloyds Banking Group, said: "We are seeing our customers behaving very rationally. A number are not necessarily banking the reduction in their interest payments but are actually using that to pay down their interest. This is a very positive move. Not only can it help customers shave interest off their mortgage, it also means less of a payment shock should interest rates begin to move back up."

However, borrowers with more expensive debts to clear, such as credit card loans, are advised to prioritise these ahead of mortgage overpayments.