How can we cut costs if we switch to a repayment mortgage?

12 September 2016

Q

How can we cut costs if we switch to a repayment mortgage?

We have an interest-only mortgage with a rate of 8%. Our repayments are £451 a month.

We also have a £8,500 personal loan that we are repaying at £60 a month. We want to switch to a repayment mortgage, but how to do we minimise the increase in our repayments?

From
DS/Bradford

A

It makes sense to review the rate you are paying on your mortgage regularly, as shopping around could help you slash your monthly payments.

Given your mortgage is likely to be your single biggest outgoing, it is vital to make sure you are getting the best value you possibly can.

It sounds like you are intent on switching the mortgage to repayment, which will mean that the mortgage reduces each month, rather than just the interest. This will guarantee that the mortgage balance is completely repaid by the end of the mortgage term.

 

Your existing lender may be happy to switch you across to repayment as long as it is affordable. However, it will mean that your monthly payments will increase, so this will be another good reason to make sure that you get the best rate you can to help reduce the impact.

The interest you are paying on your mortgage is very high in comparison with today’s rock bottom rates. If that is because you are tied into a long-term deal, then you will need to factor in any early repayment charges into the decision to switch.

But even taking penalties into account, it may still make sense to switch, given how low rates are at the moment as you may save the penalty back and more.

If the rate is higher because of personal circumstances, such as historical credit issues, then the options available may be more limited. But it is still worth seeing what the options are as cutting the interest rate will make your switch to repayment far easier.

Best mortgage rates

Mortgage TypeMax Loan-To-Value (LTV)ProviderRate
Two-year fix65%HSBC0.99%
Two-year fix85%Yorkshire Building Society1.57%
Tracker65%The Coventry1.75%

Source: Moneyfacts, 5 September 2016.