FOOL'S EYE VIEW
Five Ways To Make Your Mortgage Go Away!

By Alison Hunt (TMFAlly)
August 9, 2005

For most of us, the mortgage payment is one of the larger, if not the largest amount to go out of our accounts each month. This is unsurprising really, as our house is usually the biggest debt we have. However, although signing up to those monthly payments for 25 years means we know we will eventually own our home, it also means that we have a quarter of a century worth of payments to look forward to. Or does it?

Most Foolish readers will know that for those that are willing, there are ways to hack your biggest debt down to size and pay it off years earlier. And just imagine how healthy your bank balance could look, if you no longer had to make mortgage payments? So if you'd like to whittle away that debt and make your repayment mortgage go away faster, here are some top tips:

1. Re-mortgage regularly

What is the interest rate that you're currently paying for your mortgage? If you're not sure, find that statement and check. Better still, call your lender and ask, and while you're at it, ask how long you're tied in for. Mortgage rates usually revert to our lender's Standard variable rate (SVR) (typically around 6.5% at the moment) when the introductory period expires, so a bargain rate of less than 5% can suddenly leap up to something rather nasty. For example, a £100,000, 25-year mortgage at 5% could increase by a whopping £91 a month!

So what's the solution? Re-mortgage regularly. Know the details of your mortgage and when that attractive introductory rate is about to expire, start looking for competitive deals. With the latest reduction in the base rate, Charcol believes that by failing to re-mortgage to a better deal we could be effectively turning down a 10% average pay rise (saving around £2,400 each year for someone earning £24,000 pa). Get a feel for what's on offer by checking out the finance pages of national newspapers. Then, importantly, give your lender a ring. By explaining the types of offers currently available, you can ask it for the best deal it can offer you. Re-mortgaging with your current lender is useful as not only can you can save money on surveys and other fees that new lenders will require, your re-mortgage should also be processed much more quickly, making it less likely that you'll have to revert to your lender's SVR at all. But if your lender won't offer you a deal that's up to scratch, there are plenty that will!

2. Overpay

Many of us buy our houses and then simply pay the monthly payment dictated by our mortgage lender for the 25 odd years specified. However, if I were to tell you that by paying a little extra each month you could shave years off the term of your mortgage, would you be interested?

Mortgages, when all said and done, can be regarded simply as monster loans. And even though their interest rates are usually pretty low, like any other loan they still accrue the stuff at a rate of knots. At the start, if you've got a repayment mortgage, your monthly payments are split; a huge chunk being used to simply pay off the interest accrued with a far smaller lump actually attacking the beast itself. As time goes by, these proportions shift, until finally, when the loan is reaching its end you will be paying off far more capital than interest.

However, for those with a flexible mortgage (one that allows overpayments) by paying in a little extra each month you can attack your mortgage debt much faster, meaning that not only will you pay far less in interest and you can shave years off the term as well. For example, a simple overpayment of £50 each month into a £100,000, 25-year mortgage at 5% will save you over £12,250 in interest, and mean you'll have paid it off three and a half years earlier! Overpay by £150 each month and that's over £27,400 saved, and you'll have paid it off more than eight years earlier! Many flexible mortgages allow you to overpay by up to 10% each year, giving plenty of scope to whittle away at that mortgage. And if you're concerned about finding that extra to overpay with well why not use the money you have saved each month by re-mortgaging to a cheaper deal, for a start?

3. Reduce your term

This is a similar technique to overpaying, but is useful in its own way. If, for example, you have already overpaid by over 10% into your flexible mortgage and would like to overpay a little more, or if your lender doesn't allow overpayments, reducing your term could solve your problem. By lessening a 25-year, £100,000 mortgage at 5% to a 20-year term; for example, your mortgage payments will increase by £76. However, you've reduced your term by five years, and saved yourself nearly £17,100 in interest. Although the effect of this technique is the same as overpaying, as you have agreed a lesser term with your lender it shouldn't interfere with the 10% overpayment maximum imposed by most flexible mortgage lenders, useful to know, should you come into a sum of money.

4. Say no to Mortgage Equity Withdrawal

The spate of house price increases over the past few years has led to a great deal of excitement amongst homeowners. Many have chosen to move house to make the most of their newfound housing wealth. However, many others have chosen to stay put, deciding instead to have their property re-valued, and cashing in by withdrawing this extra equity instead. Mortgage equity withdrawal (MEW) can be a good way to borrow should the money be used to add value to your home (fund an extension etc). However, when you take the currently depressed housing market into consideration, you can see that withdrawing equity from a property that could easily have been over-valued is a dangerous game. After all, should house prices fall, your property could end up in negative equity - you could owe more than it is worth. Only consider MEWing if you really need to do it. Otherwise, do as many others are doing and consider sitting tight, knowing that you will still be able to afford your mortgage payments even if interest rates should rise or your house price should fall.

5. Cheaper insurance

Finally, remember that your mortgage provider can only afford to give those best buy table-topping interest rates because it is making money elsewhere. And how is it scraping its money back again? Through persuading you, the borrower to take out its various insurance policies. Are you currently paying for a Mortgage Payment Protection Policy (MPPI)? These policies can add a whopping £50 to a £500 monthly mortgage payment and for many people are a complete waste of money. What's more, if you do feel that you need the cover you can probably find the same for less than half the price by simply shopping around. And MPPI is not the only expensive insurance your lender will try to flog you, chances are you've already taken, or were offered buildings and contents and contents cover too. These policies are always far from competitively priced and a few simple searches on the Internet or via an insurance broker is likely to find you the same cover for far less. So shop around before accepting cover from your lender, chances are you can find yourself a far cheaper deal for a little work.

Find cheaper cover in our Insurance Centre.

So if you fancy hacking away at that mortgage, why not follow these tips? They could save you thousands of pounds and mean you own your home in much less time!

Find a better mortgage deal in our Mortgage Centre.