Five ways to pay off your mortgage faster
By Chris Gilchrist 13th
November 2007
Many people want to pay off their mortgages as fast as they can. I’m not one of
them - I’ve previously explained why I plan to keep my mortgage for the rest of
my life.
But if you want to accelerate repayment of your loan, here are the most effective
ways to achieve it.
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#1: Simple: get a better deal and save £3,500
The easiest way to make a big reduction in cost and term is to switch to a lower-cost
deal. The mortgage market is furiously competitive. Nobody should be paying a lender’s
Standard Variable Rate of a typical 7.25%. There are excellent short-term deals
over two years at about 5.5%.
broker’s comment:
Switching from an SVR of 7.25% to a two-year tracker deal at a rate of 5.5% would
cut your monthly mortgage payments by £146 (based on a £100,000 interest-only loan).
This equates to a saving of £3,500 over the two years.
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#2: Easy: pay a bit more
Grit your teeth and up your direct debit. Paying an extra £50 or £100 per month
will make serious inroads into the mortgage term. In fact you could easily shave
five to seven years off a 25-year term. But ensure you get the full benefit of overpayment
and don’t incur any lender charges - see below for details.
Mortgage broker’s comment:
Overpaying by £100 per month would save over £30,000 in interest and cut the mortgage
term by seven years (based on a £100,000 repayment mortgage over 25 years at a rate
of 6.50%). If you are thinking of making regular capital payments, you should make
sure that your lender would allow you to do this without incurring Early Repayment
Charges. You should also check that your mortgage is calculated on a daily interest
basis so that you benefit immediately from any overpayments.
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#3: Opportunistic: pay in lump sums
Maybe you can’t afford to commit to an extra monthly payment. But if you find cash
has built up in your savings account, or you get a bonus or other windfall, then
make a lump sum payment into your mortgage account. Even a couple of payments can
knock years off the mortgage term.
Mortgage broker’s comment:
Making a lump sum overpayment of £5,000 at the end of the fifth year of a 25-year
mortgage will save £12,106 in interest and cut around two years off the mortgage
term. (Based on a £100,000 loan at a rate of 6.5%).
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#4: Canny: benefit from offsetting
Offset mortgages effectively allow you to earn a higher rate of interest on your
savings and apply this to your mortgage. The effective rate you get is the rate
you pay on your mortgage plus income tax, so if your mortgage rate was 6.5%, then
offsetting would mean you got an effective interest rate of 8.1% on your savings
as a standard rate taxpayer.
Mortgage broker’s comment:
Switching to an offset mortgage with £20,000 of savings to offset would save you
£680 over two years, compared to sticking with a traditional scheme. For a higher
rate taxpayer, the saving would rise to £1,160. This saving takes into account the
interest you would earn from your savings if they were not offset against the mortgage.
(Based on a £100,000 repayment loan over 25 years and assuming a mortgage rate of
6.5% and a savings rate of 6.00%.)
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low cost mortgage offers here
#5: Control: with the current account mortgage
A current account mortgage gives the same benefits as offsetting, but more besides.
Your salary and other payments into your current account reduce the mortgage balance,
so you shave more off the interest payments. And you can make ’reversible’ lump
sum payments into the mortgage, because you have a limit up to which you can withdraw
capital if you want to.
Mortgage broker’s comment:
Switching to a current account mortgage (CAM) will not necessarily save you much
more money compared to an offset deal. The general principle is the same and rates
on CAMs are higher than standard offsets. What they do offer is ultimate flexibility
with your mortgage, current account and savings all lumped together making what
is essentially one big overdraft.
Use one or more of these five ways to cut your mortgage term and look forward to
early release and big interest savings.
Use Easier2move for one of the best value conveyancing services
around
Article produced by EveryInvestor.co.uk
