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Mortgagees are being urged to take full advantage of the record-low interest rates by overpaying on their loan.

In doing so, they could knock thousands of pounds off their interest payments, mortgage providers and personal finance experts have advised. However, consumers need to do a spot of research to ensure they are getting the most out of overpayments.

Setting the bar in the game of rate limbo

Although the mortgage market has been enduring some fairly torrid weather in the global economic storm, one benefit for the average mortgage holder has been the Bank of England's eagerness to cut interest rates down to size.

Since the start of the financial crisis in September, the Bank's Monetary Policy Committee has reduced the base rate of interest by a record 4.5 percentage points, taking it to just 0.5 per cent.

This is the lowest the rate has ever been in the Bank's 315-year history and homeowners have been clamouring to take advantage.

And while some consumers on tracker mortgages have already felt the benefits of the continual cuts to the base rate as their monthly payments have continued to fall, homeowners are being urged to take full advantage of the rates by overpaying on their mortgage.

The Observer's personal finance correspondent Jill Insley has reminded consumers that in addition to helping people save money in the long term, making overpayments can also reduce the likelihood of falling into negative equity.

Meanwhile, by paying down mortgage debt, customers will own a larger portion of the property by the time it comes to search for a new mortgage deal.

This, Ms Insley points out, is particularly useful in the current environment as banks are much happier to offer competitive products to those who have a smaller outstanding debt to pay.

However, she adds that it is important that customers are aware of the limits some banks impose on overpayments.

Sounding out the best deal

Although most mortgage lenders will allow customers to overpay on their debt to the value of ten per cent each year, some providers are not so lenient and may impose penalties for doing so, something which may be worth researching if you are looking for a new mortgage deal.

Meanwhile, speaking to the Observer, Richard Morea, of mortgage broker London & Country, said that there are other terms and conditions that customers should talk over with their provider before committing to a new deal.

For example, he explained that while Alliance & Leicester will allow people to overpay by ten per cent each year, it only accredits overpayments in January.

In this instance, it may be worth putting additional money aside in a high-interest savings account and handing over a lump sum at the end of the year to avoid money sitting idle for up to 12 months.

"There will be examples from purely a financial point of view where you would be better off investing the money rather than overpaying, but for most borrowers there's a certain comfort in reducing the size of their mortgage," Mr Morea concluded.

Riding on the windfall

First Direct has also been vocal in its support of making overpayments, identifying the strategy as one of the top five ways to defy the credit crunch.

Indeed, in advice issued last month, the company pointed out that while overpaying your home loan can help to cut the total repayment term considerably, those with large credit card debts to pay can also use the windfall from reduced mortgage payments to pay off these high-interest debts first.

Other top tips provided by the bank include switching to an offset mortgage, which could save the average household around £56 a month.

Commenting, First Direct spokesperson Jimmy Kelly said that many people had already woken up to the benefits of this tax-efficient method of linking up your savings with your mortgage payments.

"In fact, offset mortgage lending now accounts for £1 in every £10 being lent to UK mortgage holders. In the past three years, 400,000 new offset mortgages have been issued, taking the amount of UK home-owners with an offset mortgage to 1.1 million," he claimed.

However you choose to take advantage of the record rates currently being experienced, it is always advisable to carry out thorough research on each mortgage product before coming to a decision, ensuring that your money is put to best use while rates are down. ©

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