Lloyds Banking Group promotes overpaying

Lloyds Banking Group (LBG) is encouraging its mortgage borrowers to make overpayments on their mortgages.

Overpaying – where the borrower pays the lender more than they are officially obliged to – can allow people to pay off their mortgages early, and potentially save tens of thousands of pounds in the process.

LBG, which includes Lloyds TSB, Halifax, Cheltenham & Gloucester, Bank of Scotland and Birmingham Midshires, has hitherto allowed borrowers on its variable rate mortgages to overpay by up to 10% of the outstanding balance of their mortgage every month.

It has now extended that limit to 20% for one year. The rationale is that, while mortgage rates remain low, more people can afford to make overpayments. And for those who can comfortably do so it makes sense to pay down their debt before rates rise. It is estimated that around 25% of borrowers have overpaid on their mortgages during the last year.

Halifax, the largest mortgage lending arm of LBG, could not say how many of its existing customers were using the current 10% facility, but a spokeswoman said it was responding to customer interest: “We have had people phoning us up asking how much they can pay off."

The Bank of England estimates that cutting the Bank Base Rate to 0.5% has saved mortgage borrowers £20bn in the last year.

Stephen Noakes, commercial director of mortgages at Lloyds Banking Group, said: “The average mortgage repayment has dropped by around £188 per month. And those on tracker mortgages have done even better - on average they are just over £400 a month better off.”

The Council of Mortgage Lenders (CML) suggested that some of the money saved as been showing up in the form of higher monthly repayments. The easiest way for borrowers on variable rate mortgages to to overpay is simply to maintain their repayments at the existing level when the interest rate drops.

Overpaying on your mortgage can be more cost-effective than saving money, as the rate of interest you are not paying on your mortgage is generally higher than the rate you could get on a savings account, and there is no tax to pay.