Matthews IFA Ltd
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Cut your mortgage costs!

Buying a home is nothing less than a massive financial commitment. More than 8.6 million UK households have a mortgage costing an average of £600 per month, according to the Office for National Statistics.

We typically pay £3,468 interest a year on our mortgages. For the average 25-year home loan, that’s a whopping £86,700 interest. and that’s only if we have the average mortgage at the average interest rate.

Check the rate: We typically pay £3,468 interest a year on our mortgages, for the average 25-year loan, that's £86,700 interest.

Those who live in the South or have bigger houses are likely to pay more, as are those who can’t get access to cheap deals, such as buyers with smaller deposits. Londoners face average monthly repayments of £925 and pay £142,000 interest over 25 years.

Let’s look at this another way. You might not think it matters too much if you pay an extra 1 per cent on your mortgage. But on a £100,000 mortgage over 25 years this could cost you more than £16,000 in extra interest.

The higher the interest rates are, the bigger the difference. So how can you pay less interest on your mortgage and get this beast off your back sooner?

KNOW WHAT YOU’RE ACTUALLY PAYING

When choosing a mortgage, it’s vital to work out the overall cost of the loan. Most people choose fixed rates because they provide certainty, but the smorgasbord of deals can be baffling. Some have low interest rates with high arrangement fees, while others combine a higher interest rate with a lower fee.

As a general rule, the more you intend to borrow the more vital it is to keep the interest rate low. At the same time, those borrowing less should beware of bigger arrangement fees which can hike the overall cost.

The crossover point is often between £150,000 and £200,000. For example, one lender was recently offering a two-year fix at 2.49 per cent with no arrangement fee. This would cost £448 per month for a £100,000 home loan, giving a total cost of £10,752 over two years.

Another was offering a lower 1.6 per cent (£405 per month) with a £1,999 fee. Here, the total cost over two years would be £11,719. So, in fact, the higher interest rate actually works out £967 cheaper.

But the tables turn once you start borrowing much more. For a £200,000 mortgage, the 1.6 per cent deal works out slightly cheaper, costing £21,415, including the fee, compared with £21,504 for the no-fee deal.

Think of a high arrangement fee as paying interest upfront and suddenly those deals can seem a lot less attractive. A good mortgage adviser will do the sums for you.

Check before you buy: A surprising number of people stick with one lender without shopping around by using a broker – this can be an expensive mistake!

SO, WHAT MAKES A GOOD MORTGAGE RATE?

You’ve got four balls to juggle to bag a low home-loan rate. These are the size of the deposit you’ve saved, the length of your deal, its type and the lender you choose.

Rates have been slowly rising but if you have a decent deposit of 25 per cent or more you should still be able to get a two-year deal for 2.5 per cent or lower with free basic valuation and legal work thrown in. This would cost about £673 a month for a £150,000, 25-year repayment loan.

With a smaller deposit, expect to pay more. If you’ve only a 10 per cent deposit, you will have a far smaller selection of lenders to choose from and you may have to pay 4.5 per cent or more. This would be £835 per month on a £150,000, 25-year loan.

For a five-year deal, you will have to pay more than 3per cent, even with a 40 per cent deposit.

If you can only put down 5 per cent, then the rate is likely to be more than 4 per cent (£792 per month) and possibly close to 5 per cent, a whopping £877 per month for a 25-year, £150,000 repayment loan.

This is around 2 per cent more than the cheapest loans and it could cost you more than £10,000 extra over the five-year fixed period.

WHICH IS THE BEST PERIOD FOR A FIX?

Longer fixes clearly give you more security but, against this, they are more expensive. However, many experts now consider that it could be worth paying the extra. This is because a two-year fix will finish in 2016 when mortgage rates will probably be rising gently. So fixing for two years will gain you a little in the short term but you could lose more in the longer term.

Another thing to consider is fees. By taking two-year fixes you could pay five fees of typically £500 to £2,000 in 10 years. Five-year fixes would involve just two fees.

THE JOYS OF OFFSET

Offset mortgages are a great way to cut the amount of interest you pay. Basically you keep your savings with your lender but, usually, in a separate account. Instead of being paid interest on your savings the money is deducted from your mortgage and you are only charged interest on the difference.

It can be particularly useful if a lender will also offset any money sitting in your current account so you benefit from being charged less interest from the day your salary is paid.

For instance if you owe £100,000, have £20,000 in a savings account and £2,000 in your current account then you would be charged interest on the £78,000 difference.

It’s basically like being paid tax-free interest at your mortgage rate. In these days when it’s hard to get 1 per cent interest on savings accounts, this is a particularly efficient way to use your money.

If you borrowed £150,000 for 25 years at a starting rate of 2.79 per cent, and kept £20,000 in your current or savings account then you could pay off your mortgage more than two years early. You’d avoid paying almost £5,600 interest as well.

Alternatively you could take the benefit as you go and pay £44 less interest each month but keep your mortgage term the same. Plenty of lenders offer offset including Woolwich, First Direct and Yorkshire Building Society.

HELP YOUR KIDS EVEN IF THE BANK OF MUM AND DAD IS SHORT OF CASH

Parents or grandparents often want to help children buy their first home. But if you can't afford to simply sign a big cheque for £20,000 or £30,000 what can you do?

BE A GUARANTOR

The traditional option was to become a guarantor. This would allow your children to take a larger loan, but it is fraught with danger. Typically the lender will expect you to put your home as collateral, so if your children don't pay their mortgage, the lender can come after you.

That's all very well for your own children, but what if they are married or co-habiting? Do you really want to gamble your home on your son or daughter's relationship?

OFFER A 'PARENTAL OFFSET'

These allow parents or grandparents to use their savings to reduce the amount of interest their children will be charged. Your money stays in your own savings account and your children can't touch it.

The catch is that you won't earn any interest. Instead your savings will be set against the amount they have borrowed, so they will pay less interest.

Lenders who offer this style of deal include Yorkshire Building Society and Market Harborough BS.

PUT DOWN A PARENTAL DEPOSIT

This is similar to the offset, but a parent's savings can be used to make up the deposit and reduce the amount of interest charged, thus keeping down your children's repayments.

For example, the first-time buyer may have a 5 per cent deposit. The parents could provide a further 20 per cent which is then locked into a savings account in their name, usually for five years, or until a certain amount of equity is built up in the property. But the main thing is that the savings remain the parent's not the child's. Market Harborough offers this scheme.

WHY A LITTLE EXTRA HELPS

If you don’t have an offset mortgage then you could instead pay extra on your own mortgage either monthly or by lump sum. By overpaying, you can reduce both the amount of mortgage interest and time spent making repayments. There are some things to get right here, though.

First check your mortgage terms to make sure you are allowed to overpay and won’t be charged a penalty - as a rule of thumb, you can repay 10 per cent of the outstanding sum each year without a fine.

Be especially careful with fixed rate mortgages - some will allow a degree of overpaying, others won’t allow any. Then give your lender written instructions that you want your repayments to remain the same so that you reduce the mortgage term. If you don’t, they may recalculate what you owe and ask you to pay less each month, without reducing your mortgage term at all.

Whatever you do, always ensure that you take advice before making changes to your mortgage, or you could be making a costly mistake!

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