"Overpaying on the mortgage, if the client can afford it, will never be a bad decision. However it may not be the best decision they could make."
The dream of being mortgage free is an attractive one. For most of us, the mortgage is the largest debt we will ever take on, and will take an awfully long time to clear.
If there are ways to shave a bit of time off that process, then they have got to be worth considering.
That’s why it’s so common for mortgage holders to look carefully at overpayments, particularly if they find themselves with a bit of spare cash to hand each month.
But I’d argue that while overpayments are a useful option, advisers need to help clients consider all of their options before opting to top up the mortgage payments each month.
Cashing in on Dry January
We had a good example of this thinking last month from Santander. Its research centred on Dry January, and the number of people hoping to make a positive start to the new year by avoiding alcohol.
According to the bank, homeowners who put the price of four pints - around £19 based on their study - into mortgage overpayments would end up trimming about nine months off their mortgage, and potentially saving more than £4,500 in interest payments.
Bigger drinkers who choose to redirect their money away from the pub and into the mortgage stand to benefit even more significantly. Overpaying by £144 a month on the average mortgage - the equivalent of around 30 pints per month - would save almost £30,000 in interest, and reduce the time taken to pay off the mortgage by four years and eight months.
It’s great motivation, the idea of being mortgage free earlier than expected. It’s even more compelling when you consider the amount of money potentially saved through mortgage overpayments.
The point extends far beyond Dry January too. If we go through our budgets and find there are areas where savings can be made, it makes sense to instead devote that cash towards something that will leave us better off in the long run.
The bigger picture
However, it’s important for clients to consider their full range of options. While mortgage overpayments are an appealing option, advisers are well placed to encourage them to consider whether there are other areas where the ‘spare’ money would be better spent.
For example, does the client have sufficient protection in place? It’s all well and good to take steps to trim the eventual cost of the mortgage if everything goes to plan, but life has a habit of throwing a spanner into the works.
Would the client and their family be in a better position if that money was instead devoted towards life insurance or income protection, so that if the main breadwinner fell ill or even passed away, their loved ones would be able to remain in the family home?
Equally, if the client has little set aside in savings, or no pension to speak of, then it may be prudent for them to focus those disposable funds on building a short- or long-term safety net.
That’s where advisers really earn their crust, taking the bigger picture into account and helping their client to make the best overall decision.
Overpaying on the mortgage, if the client can afford it, will never be a bad decision. However it may not be the best decision they could make.
Making the case
That said, it’s not always easy for advisers to make this argument, to point their client in a better direction.
Financial products are not viewed equally by our clients - the enthusiasm for mortgages, and the immediate impact they have on our lives, may not be matched by the more long-term, less obvious benefits that come from protection or saving into a pension.
Essentially, there is a different skillset involved. These other products need to be sold, with advisers actively making the case for why they make sense to the client. There is some convincing that needs to go on, to help a client understand that while they may not be thrilled with the idea of putting that money into an income protection policy each, for example, they will be better protected as a result.
It’s not something that comes naturally to all advisers, but it’s a skill that they must take steps to develop. It’s something we have worked on extensively at Rosemount, particularly around protection, by holding surgeries and masterclasses to ensure that advisers are best placed to not only make the case for protection but to overcome the challenges and queries clients may present.
In the age of Consumer Duty, advisers need to be able to demonstrate that they are helping clients secure positive outcomes. Feeling a bit uncomfortable about talking about protection and the like isn’t going to cut it.
Plotting a course
Whenever a client finds themselves with additional income, whether through finding savings in their monthly budgets or perhaps securing a pay rise, advisers have a crucial role to play.
The obvious option, the one that the client is naturally inclined towards, will not always be the right course of action and it’s up to advisers to make that case.
