Reduce your mortgage debt

7 July 2009

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.

1. If you have a tracker mortgage, then your monthly repayments will have decreased in line with the Bank of England base rate.

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.

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