Your mortgage may be your biggest regular outlay. If you're not sure how healthy yours is, a check-up could save you a mint – and mortgage newbies can work out how to secure the home of their dreams
Chances are you spend very little time thinking about your mortgage – yet it is probably the biggest bill you have to pay month in, month out. If you think your home loan could be in better shape, try our ‘Mortgage MOT’ and see if you could trim your costs. Or, if you are yet to buy your own home, find out what you can do to take that elusive first step on to the property ladder.
Switch from SVR
Almost one million borrowers are paying their lender’s standard variable rate (known as SVR). This is the default rate you roll on to after an initial fixed or tracker rate deal (a rate that tracks the Bank of England base rate) comes to an end.
But with the average SVR at 4.89%, according to independent data compiler Moneyfacts, and some SVRs even higher than 6%, there are big savings to be made by switching. By comparison the best short-term fixed rates are less than 2%.
Dig out your mortgage paperwork and check if you are still in a ‘deal’ – a fixed or tracker rate – or if you are paying your lender’s SVR. Find out your interest rate and what, if any, penalties there might be to switch. Those tied into a deal will typically have redemption penalties to switch away, but those on SVR are usually free to move without incurring any fees.
The savings can be significant. A borrower with a £100,000 repayment mortgage over 25 years paying an SVR of 4.89%, for example, would have monthly repayments of £578. By switching to a two-year fixed rate at 2% they could cut this to just £424.
Even if there is an arrangement fee on the fixed-rate deal (fees of around £1,000 are typical) there will still be a saving of more than £2,600 over two years compared to paying your current lender’s SVR.
“Competition is fierce in the mortgage market so the majority of borrowers on SVR can make substantial savings by switching,” says David Hollingworth, associate director of communications at London & Country Mortgages.
Even so-called ‘mortgage prisoners’ should consider discussing their options with a mortgage broker. These borrowers are stuck on high interest loans with defunct lenders such as Northern Rock and Bradford & Bingley who have previously struggled to meet affordability criteria with rival lenders.
In March this year the regulator, the Financial Conduct Authority, published a report into the mortgage market, and among its recommendations were plans to make it easier for these borrowers, where they were meeting monthly repayments, to find a new mortgage deal.
“Many borrowers in this situation are meeting their monthly repayments but are paying way over the odds on high SVRs,” says Mr Hollingworth. “It is great news that lending criteria is being relaxed to enable these homeowners to shop around and find a better rate.”
Use a broker to find a better deal
Searching for a new mortgage can be daunting, which is why so many borrowers end up paying their lender’s SVR for so long. But there is help to navigate the market and switch to a better deal – a process known as remortgaging.
A good mortgage broker can search across the market to find the best deals – looking at different interest rates and set-up fees to work out the total cost.
Different deals might suit your needs depending on the size of your mortgage, the amount of equity (part of the property that you own) and your credit rating. And there is not usually a fee to use a broker, with most brokers taking their commissions instead from lenders.
Richard O’Reilly, mortgage expert, at online mortgage broker Habito, says: “Remortgaging may sound complicated but it doesn’t have to be. A broker will search the market to make sure that you get the best deal out there and that the savings are worth the effort.”
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Lock in security
Long-term fixed rates are attractive to homeowners because they give certainty over exactly how much your mortgage repayments are going to be in the longer term.
Many people opt for this security, even if it costs them more each month when compared to a short-term fixed rate or tracker.
However, if interest rates fall you may not be able to take advantage of a better deal if you have locked into a fixed rate. Borrowers need to weigh up their priorities and whether they would be able to afford the mortgage at different rates.
“With rates at historic lows five-year and even 10-year fixed rates have grown in popularity,” says Mr O’Reilly. “Due to increased competition the difference in rate between five-year and two-year fixed rates has narrowed, so it means more borrowers have decided to take the longer-term option.”
Overpaying to prepare for the next rung
Charlotte and Matt Lenton from Boston, Lincolnshire, have their eye on a house move soon and are trying to build up equity in their current home. Charlotte, 24, who is studying for a master’s degree in gender studies, and Matt, 28, a car mechanic, pour all their disposable income – £500 a month – into the mortgage, on top of their regular repayment of £270 a month.
Charlotte and Matt have deliberately remained on their lender Santander’s ‘Follow-on rate’, at 4% (even though they could get cheaper fixed deals elsewhere) as there are no penalties to make unlimited overpayments.
This Santander rate is variable and tracks at 3.25% above the Bank of England base rate (which is currently 0.75%).
“We hope to be able to buy a new place once I graduate and am working full time – hopefully next year,” says Charlotte.
“We know it is important to get ourselves into as strong a position financially to be able to climb up the property ladder. So we are budgeting hard now to be able to overpay on the mortgage.”
Overpay on the mortgage
If you have any spare cash left each month, overpaying on your mortgage is an excellent option. It speeds up the repayment of your mortgage and reduces the interest you pay.
“It’s important to keep a buffer of savings in a bank account for emergencies,” says Dilpreet Bhagrath, mortgage expert at digital broker Trussle. “But once that buffer is in place, overpayments on the mortgage are a fantastic, tax-efficient way of maximising your additional disposable income and making considerable savings.”
Most mortgage deals allow up to 10% of the mortgage balance to be paid off in overpayments each year without penalty. But always check with your lender. And remember, it is not usually possible to get the overpaid money back.
On a £150,000 repayment mortgage over 25 years with a 2% fixed-rate mortgage, the monthly repayments would be £636. If the borrower overpays £100 a month they would clear their mortgage four years and two months earlier – and save £7,301 in interest. The calculation assumes the interest rate remains the same throughout the mortgage term.
Problems with repayments? Don’t bury your head in the sand
Getting into payment difficulties with your mortgage can be extremely stressful – but taking early action can help stop the problem from escalating.
If you have a change of circumstances, such as illness or job loss, which is going to affect your ability to meet your mortgage repayments speak to your lender. Under guidance set out by the regulator all lenders are required to treat customers in difficulties sympathetically and to offer solutions. Depending on your situation it may be possible to switch your mortgage to interest-only repayments for a short time to alleviate the pressure, for example.
Lenders should also be able to set up a regularly reviewable payment plan with you based on what you can afford. This will give you some breathing space.
“Pre-empt any issues and talk to your lender as soon as possible,” says David Hollingworth, associate director, communications at London & Country Mortgages. “It is always better if you can flag up difficulties early and work with your lender rather than ignore the problem, which will usually make the debt situation much worse.”
For independent debt advice visit nationaldebtline.org (0808 808 4000) or contact citizensadvice.org.uk.
Consider an offset loan
For borrowers who also have savings, an offset mortgage offers another way to get those cash savings to work harder. With an offset loan – providers include Barclays, First Direct, NatWest, Scottish Widows Bank and Yorkshire Building Society among others – your savings are offset against your mortgage so you only pay interest on the balance.
So if, for example, you had a £150,000 mortgage and £30,000 in savings you would only pay interest on £120,000. This can significantly reduce your monthly repayments, and borrowers retain access to their savings at all times.
However, most borrowers use offset loans as a way of reducing the term of the loan – so they keep their repayments the same and effectively overpay, clearing the mortgage years early and saving thousands in interest.
The flexible features of offset mortgages are appealing but borrowers may pay a premium compared to the best fixed and tracker-rate deals available, so be sure you will use the offset facility if you go for this type of mortgage.
First-time buyers: get help on to the property ladder
Save as much as possible to be able to access the lowest fixed rates. Although deals have improved for those with just a 5% deposit, fixed mortgage rates improve significantly for those with a 10% deposit or more to put down on their first home.
Many people will be lucky and have help from the bank of Mum and Dad. Research by savings provider Foresters Friendly Society shows that almost one-third of parents intend to contribute toward a deposit on their child’s first home.
Tax-efficient savings schemes such as the Help to Buy Isa and Lifetime Isa are also good places to start, offering a government bonus to add to your savings towards a first home.
Taking your mortgage over a longer term can make monthly repayments more affordable. Most lenders will allow a mortgage to be taken over 30, 35 and even 40 years, depending on your circumstances, compared to the historic standard 25-year term.
But the downside is you will pay much more interest over the term if you do not reduce it at a later date.
Mr Hollingworth says: “Most borrowers will try to cut the term further down the line when finances might have changed. This is always advised where possible to avoid paying a lot more interest.”
Tori Hull, 23, and her partner Ollie Hensberg, 24, a project engineer, have decided to do this to keep their repayments down. They have taken a mortgage with Accord at 3.21%, putting down a 5% deposit on their new home in Devizes, Wiltshire, with a term of 35 years. It means the monthly repayments on the £170,500 loan will be £677, compared to £827 if the mortgage was taken over 25 years.
“Taking the loan over 35 years instead of 25 is what enabled us to buy the property. Otherwise the repayments would have been unaffordable,” says Tori, who works in training for the Ministry of Defence. “We are young so we are not worried about the loan term being over 30 years. It is our plan to reduce the term at a later date when we remortgage. But we’re not in a rush.”
JO THORNHILL is a personal finance journalist who has written for Money Observer and thisismoney.co.uk.