FOOL'S EYE VIEW
Save Money On Your Mortgage

By David Berger
June 27, 2001

Today, we're going to talk about mortgages and how to save money on them. But first, there's a nasty laboratory experiment they do (or used to do) with rats. It involves taking one of the unfortunate rodents, sticking it on a wire mesh and then applying electric shocks to the mesh with such ferocity and frequency that ratty gives up trying to avoid them and simply lies there, huddled in a daze. This state of complete, hopeless, helpless surrender is known to animal torturers and psychologists as "Learned Helplessness". You may recognise it. It's the kind of state most of us end up in when faced with sorting out our finances and, let's face it, mortgages are the worst.

The whole subject seems so needlessly complicated and so designed to baffle that we just give up and huddle in a ball, like the rat. Standard variable rate, fixed rate, capped, collared, loan-to-value, interest-only, repayment, endowment (Horreur!), capital repayment vehicle, Australian mortgage, flexible mortgage, redemption penalty, current account mortgage, I could go on and on. But I won't. Instead, I'll run through five simple questions to consider. Take notice, because just a little knowledge now could save you a lot of money in the future and leave you as the person applying the electric shocks to your mortgage lender, rather than the other way round...

1. Is the interest calculated daily or monthly?

If you have a mortgage in which the interest is calculated daily, you will find you pay much less interest over time because every payment immediately reduces the amount you owe. With a mortgage where the interest is calculated monthly, it could be a month after a payment before the interest is recalculated to the lower rate, so you end up paying interest on money you don't actually owe any more. It's a great little game for the mortgage lenders, but not for you, so, if you can, opt for a mortgage where the interest is calculated daily. This simple step could reduce the total amount of interest you pay on your mortgage by tens of thousands of pounds.

2. Is the mortgage flexible?

This isn't for everyone, but a flexible mortgage can make a lot of difference. These mortgages allow you to overpay or underpay on your mortgage, usually up to a specified amount and this is very useful for periods when you have a cash surplus or cash drought. Making periodic overpayments can help bring your mortgage down quickly. The flip side is that the capacity to make underpayments can be a dangerous temptation for some people. If you don't have the self-discipline to cope confidently with a flexible mortgage, then turn back, do not approach any closer!

3. Do I fancy a flexible current account mortgage?

Boy, now we're getting into some jargon. These are the latest thing and are worth knowing about. They're flexible (see 2.), they calculate interest daily (see 1.) and they allow you to amalgamate all your accounts – credit card, current account, savings account, mortgage etc. – under one roof. The advantage of this is really quite clever, because it means that whatever you have in your current or savings account at the end of each day can be offset against your debts – mortgage, credit card, personal loan, overdraft etc. In other words, say you have £2,000 in your savings account, you can choose not to receive interest on it, but instead to offset it against your mortgage. There are two reasons to do this. Firstly, instead of receiving interest on your £2,000 at a lower rate than the interest you are paying on your mortgage, you don't pay interest on £2,000 of your mortgage at that higher rate. Secondly, because you're not receiving any interest on that £2,000 (instead you're not paying interest on your mortgage), you don't pay any tax.

4. Do I want a fixed rate?

You can argue until the cows come home about the merits of fixing your mortgage rate for several years, but ultimately it comes down to personal choice. If interest rates are low, as they are now, it may be a good idea and at least gives you the security of knowing for sure what your monthly outgoings will be over the fixed period. On the other hand, mortgage rates could always go even lower... Oh, who knows? Anyway, here's one piece of definite advice: if you decide to go for a fixed rate mortgage, avoid those where the period where you're liable to pay a redemption penalty (the penalty you have to pay if you move mortgage lenders) extends beyond the end of the fixed rate period. There's no need for that and there are plenty of mortgage lenders who offer fixed rate mortgages without those kind of punitive provisions. More on mortgage rates here.

5. Have I thought about remortgaging?

If not, think about it at least once a year. The mortgage market is constantly changing, rates are currently going down and new products are coming out all the time. Switching your mortgage to another lender could save you thousands of pounds over the years and it isn't difficult. You may not even have to switch mortgage lenders to get a better mortgage deal. There's a very good article on remortgaging here.

For more information on mortgages and to find the best one for you, visit our homeowning centre.

Happy hunting!