Reduce your mortgage debt
It’s a confusing time for homeowners: on the one hand, new mortgage rates are at some of the lowest levels seen for years; on the other, falling property values will eat into any equity you may have in your home.
To help you through this tricky time, here is our guide to reducing your mortgage debt.
Likewise, if you’ve recently moved onto a new fixed-rate mortgage, the chances are you’re paying less now than on your previous deal.
If you can afford to, contact your mortgage lender to see if you can use the money saved to overpay on your mortgage.
2. Many borrowers are currently sitting on their lenders’ standard variable rates, either because they don’t have enough equity to remortgage or because of the low rates on offer.
However, this is a dangerous game – you can get a better rate if you have a higher level of equity, so falling house prices could see you pay more when you eventually come to remortgage.
Either find a new deal or make overpayments to offset house price falls.
3. If you’re on an interest-only mortgage, then your monthly payments are being used to clear the interest on the loan, not the mortgage itself.
Consider switching to a capital repayment model – although your monthly payments will increase, you’ll protect yourself against negative equity.
But bear in mind that you may be charged a fee of up to £100 for switching, and you might not be allowed to switch back later on.
4. Even if you aren’t due to remortgage, you could potentially save money (that can be used to overpay on your mortgage) by leaving your current deal early for a cheaper rate.
You will probably be hit with an early repayment charge for doing this, but it’s worth working out whether the savings outweigh this cost.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.