More people need to consider mortgage overpayments

With interest rates as they are, it is more cost effective to tackle outstanding debts before trying to build up savings.

Although most people are aware of the need to pay off loans and credit cards before saving, some are unaware that the same applies to most mortgages.

A recent report by first direct found that 42 per cent of mortgage holders are regularly contributing to a savings account, but only 21 per cent are making regular overpayments on their home loan.

Most mortgages charge interest at a significantly higher rate than can be earned in savings accounts, despite the fact that home loan interest rates are considered to be at their lowest for years.

However, 31 per cent don't know the interest rate on their mortgage and a quarter do not know whether or not they are able to overpay on their mortgage, illustrating that many are unable to make this comparison.

Paula John, editor-in-chief at Your Mortgage, said that this general lack of awareness is worrying.

"Mortgages are usually most people's monthly financial commitment," she explained.

"There is a big educational job to be done - I'm not sure whose responsibility it is, whether it is the press or the lenders themselves."

However, she added that more people overpaid their mortgage in the last few years than previously, proving that the message is getting through to some.

But now interest rates are really low and savings are offering a poor return, those with spare money need to take advantage while they can.

"More people have been overpaying, but still not enough; it doesn't actually make sense and doesn't add up for you to be putting money into a savings account and not using it to pay down debt instead. It is simply a more cost effective thing to do," Ms John said.

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2012-01-31 11:19:46 © Moneyextra.com