Having a mortgage can feel like a real weight around your neck, but for the vast majority of us, it's the only way that we can actually get on the property ladder—so wouldn't it be great to find out how to pay it of a little earlier? Estate agents recognise that anything you can do to reduce your mortgage will be a a real benefit and could even, if you put plans in place before applying, help you to get that large dream house right from the word go! Put down the paintbrushes, halt the DIY endeavours and postpone the garden makeover, as it's time for some serious money-saving!
As standard, mortgages are calculated over a 25-year repayment term, but you can shorten the term to save a SERIOUS amount of interest! Naturally, your monthly repayments will be higher, but in the long-term, you'll save significant extra interest. Take a look at this example:
If you are liable for a £229,890 repayment over 25 years, it would cost £1,276 a month and the total interest amount of interest paid over the duration of the mortgage would be £153,000.
Shorten the mortgage to 23 years, and your repayments would go up to £1,337 a month, but the final interest amount would be £139,174. That's a hell of a saving!
Shorten the term even more, to just 20 years and monthly repayments become £1,453 but the interest goes down to £118,867.
Isn't that worth a few less takeaways and treats?
Overpaying your mortgage every month is a fantastic way to make a serious dent in the remaining balance and it's as simple as just increasing your direct debit a little bit! Literally, every penny counts, so even if you can only spare an extra £10 a month, it's worth doing! Read the terms and conditions of your mortgage carefully, but most lenders allow you to pay up to 10% extra a year, without incurring any penalties.
What does all this mean in real terms? If you paid 10% extra (£120) a month on a £229,890 mortgage (on a standard 25-year repayment term), you’d save £100,000 in interest payments and be mortgage free 15 years earlier!
If you're not in a position to overpay your mortgage every month, try saving up and popping any unexpected windfalls aside, so that when you are out of a fixed-rate period, you can pay a large chunk off in one go. Remember, you will probably only be allowed to take 10% off, but that will still save you a huge amount in interest!
If you paid £20,000 off a £229,890 mortgage, halfway through the 25-year term, you’d save £14,120 in interest payments alone and be mortgage free two years early!
Having a stash of savings is a great idea, which is why so many people enjoy the security of an offset mortgage. Effectively, any money you have in savings will be taken into account when calculating your interest payments, which will leave you in a far more secure financial position. To put this into real terms, if you had a £200,000 mortgage and £20,000 in a linked savings account, you’d only be charged interest on £180,000. That will soon add up, allowing you to save more, offset more and pay a lump sum off far more quickly. Naturally, you'll need to bank with the same institution that holds your mortgage.
Our final tip is to never get complacent or just assume that you have a great mortgage deal, as it stands. You might be easily managing your repayments and even saving a little on the side for a rainy day, but it only takes a few minutes to carry out a comparison these days and you can even switch online as well. The only thing to watch out for is extortionate set-up fees!
Eligibility to switch to a more attractive rate will be subject to status, but if you were to make a change from a variable to fixed-rate product, the savings could be incredible. For example, switching a 25-year mortgage of £229,890 with an interest rate of 4.49% to a new deal that charges only 3% means that your monthly repayments would fall from £1,276 to £1,090. Over 25 years, this would save your over £50k in interest payments.
For more money-saving tips, take a look at this Ideabook: Simple home money saving hacks.