Five ways to cut your mortgage bills by up to £1,900 a year – and traps to avoid
HOMEOWNERS are still feeling the pain of high mortgage costs and are finding it harder to stay on top of their bills – but there is help on offer.
The number of mortgages where borrowers have fallen behind on repayments has jumped this year.
Mortgages in arrears are up by 44.5% in the three months to the end of March compared to the same period a year earlier, according to the Bank of England.
And anyone coming to the end of mortgage fixes will likely see a jump in mortgage costs, as typical rates are much higher than two or five years ago – the times people typically fix for.
However, most lenders offer ways to help you keep bills under control, and there are other ways you can bring your own costs down.
However, you need to make sure you don’t fall into traps that could see you paying far more long-term.
Here are some options available to help mitigate your costs – and the traps to avoid.
Increase your mortgage term
When you take out a mortgage, repayments are calculated over a set time period which is usually between 20-30 years.
The longer the mortgage term, the lower the monthly repayments, as you are repaying the loan over a longer time period.
When taking out a new mortgage deal, opting for the longest possible mortgage term will reduce your bills making them more manageable in the short term.
For example, on a £200,000 mortgage with a rate of 5.25% you’d pay £1,198 on a 25-year term or £14,376 a year.
Whereas on a 35-year you’d pay £1,041 if all other factors remained the same. That’s £157 less a month and £1,884 over one year.
Chris Sykes, technical director at broker Private Finance, said: “This is something we have seen several clients doing as a cashflow measure, in the hope that rates will reduce over the coming years and they can overpay or refinance and re-reduce the term at a later date.”
However, bear in mind that if you did pay it back for the full 35-year term instead of paying it off in 25 years, you would pay more over time due to added interest.
It’s a good idea to keep an eye on what you can afford, and consider reducing your mortgage term again if your finances improve to avoid paying considerably more interest.
Ask your lender to move on to a longer mortgage term if you’re struggling to meet your payments.
Under the Mortgage Charter agreement between lenders, the financial regulator and the Government, customers can extend their mortgage term to reduce monthly payments without harming their credit file.
You then have the option to revert back to the original term within six months.
However, lenders are only obliged to offer this if you are up to date on payments.
It’s always a good idea to contact your lender if you are worried about making repayments before falling behind, as you’ll typically have more options.
Check you’re getting the best deal
The interest rate on your mortgage deal is a huge factor in dictating how big or small your monthly payments will be.
Getting the best rate is crucial, as even a rate difference of 0.2% impacts your bills – especially if you have a larger mortgage.
Lenders usually make it easy for customers to renew onto a new deal with them at the end of a term, but searching the market can be a smarter move for your money.
A good mortgage broker can help find the best value deal for your circumstances, too.
However, lower mortgage rates sometimes come with costly product fees and it can be hard to tell if it is truly the best deal, so make sure to check and get advice if you’re not sure.
It all depends on your individual borrowing level – sometimes a big product fee is worthwhile to get the lower rate.
Again, a good broker should be able to do the sums and find the deal that will cost you less.
Go interest-only for a while
Interest-only deals were widely available before the financial crisis in 2009. These deals let borrowers only pay back the interest each month, without having to pay back the actual debt.
Interest-only mortgages are still available now, but you will usually need to prove that you have the means to pay off the mortgage debt at the end of the term.
You’ll need to have a lot of equity in your property for lenders to offer the deal and may also need a minimum level of income, according to Mr Sykes.
However, if you are struggling to pay bills, you may be able to move on to interest-only payments for a short period of time.
Under the Mortgage Charter agreement, customers who are up to date with payments can switch to interest-only for six months instead of extending their mortgage term.
It’s best to switch back and start paying off your actual debt as soon as you are able to.
OFFSET YOUR MORTGAGE
Everyone should have a rainy day savings pot in case of emergency costs.
But an offset mortgage is one way of still having cash available should you need it, but in the meantime, you can use the money to lower the interest you pay on your mortgage.
A savings account is linked to your mortgage, and you don’t pay any interest on the debt equal to the amount you have in savings.
So, if you had a £150,000 offset mortgage and £25,000 in the savings account linked to the deal, you would only pay interest on £125,000 of the loan.
Offset mortgages are typically more expensive than ordinary mortgages, so are usually best for people who have larger savings pots, as they will cancel out the added costs.
A mortgage adviser should be able to help work out if the deal is suitable to your circumstances.
Fix your deal for longer
If you’re coming to the end of your mortgage term and are looking to get the lowest possible repayment, it could be worth fixing for longer.
The average two-year fixed rate is currently 5.97%, according to data site Moneyfacts.co.uk.
However, the average five-year fix is 5.53%.
This is because financial markets expect the Bank of England base rate to come down over the next couple of years and borrowing to become cheaper.
The risk is that if you tie into a five-year deal now, you could find in two years that rates are significantly cheaper, but that you are paying more because of being locked into the longer deal.
A broker should be able to help work out if it’s a good idea to fix on a deal for longer.
A part and part mortgage, combining fixed and tracker rates, is one way of enjoying the best of both worlds, according to Nicholas Mendes, mortgage technical manager at broker John Charcol.
He said: “This type of mortgage divides the loan into two portions: a fixed rate portion and a tracker rate portion.
“The fixed rate ensures consistent monthly payments, protecting borrowers from interest rate fluctuations for a set period, which helps with budgeting and financial planning.
“The tracker rate, on the other hand, varies according to the Bank of England base rate. When interest rates reduce, this portion can significantly reduce monthly payments.
“This combination can lead to substantial savings over the mortgage term, as it balances the predictability of fixed rates with the potential cost savings of tracker rates.”
Overpay your mortgage
This might sound counter-intuitive, but paying off extra cash on your mortgage can actually bring down your monthly costs.
In most cases lenders will let you pay off up to 10% of your total mortgage in one year.
Overpaying can be a good idea if you come into a lump sum of cash, but are struggling with your monthly income.
However, it’s important to make sure you do follow your lender’s rules or you could be hit with an early repayment charge.
Just ask your lender if you aren’t sure as they should be able to tell you.
How to get the best deal on your mortgage
IF you're looking for a traditional type of mortgage, getting the best rates depends entirely on what's available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.