Martin Lewis explains key interest rule that decides whether to overpay your mortgage

Martin Lewis has explained a key interest rule for paying your mortgage as rates continue to rise.

It comes after financial comparison website, recently revealed that the typical two-year fixed mortgage hit 6% for the first time since December.

Millions of people have been hit hard by the staggering increase in mortgage rates, leaving those who need to remortgage or buy a home facing a higher monthly bill.

Speaking in the latest newsletter, Martin explained: "New fixed-rate mortgage deal costs are rising rapidly, as lenders believe UK interest rates may now peak at nearer six than five per cent.

"Most have already factored in the Bank of England's likely 13th consecutive rise due this Thursday – the cheapest fixes are roughly 1% point higher than in April (c. £50/mth more per £100,000 mortgage)."

The MoneySavingExpert continued: "Today I want to look at a question I'm asked a lot: should those with savings use them to reduce their mortgage debt?"

Martin said the first rule is that if your mortgage rate is higher than you can earn in savings, then you could benefit from overpaying.

He went on to give the example – if you saved £10,000 at 3% this would earn £300 for the year, but if you used the same money to overpay a 5% mortgage it could reduce your costs by £500 over the same period.

Martin then recommended checking the MSE mortgage overpayments calculator to see how much you could save.

For borrowers who still have a cheaper mortgage rate, Martin gave the example of someone with a rate under 2% or 3% which can likely earn more in top savings.

In this case, the MSE founder recommended not overpaying your mortgage as of yet, but instead putting the money aside until your cheaper fix ends and you go onto a more expensive deal.

However, there are some cases where you may not want to overpay your mortgage.

He went on to give an example of someone with more expensive priority debts that should be paid off first, or those who haven’t yet built up an emergency fund.

Many lenders let you overpay 10% of your mortgage balance each year but add penalties above that, so be sure to check this as well.

Concluding the MSE newsletter, Martin encouraged borrowers to make sure the overpayments are put towards reducing the term of their mortgage.

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