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FOOL'S EYE VIEW
Although we generally sign up to a 25-year period when taking out a repayment mortgage, there is actually no reason why we should need to wait this long to own our homes. As long as our lender is happy that we can afford to make the payments we could sign up for any number of years really, as much as fifty, or as little as five. The important thing to remember is that a mortgage is a loan. And like any other loan, it racks up interest, every day. Now of course, mortgage interest rates are relatively low - you can find deals with APRs of 6% or less at the moment. But however low the rate, when it's used to borrow such large sums it all adds up, and over a number of years could mean that we pay hundreds of thousands of pounds in mortgage interest. Blimey! Luckily, with the advent of flexible mortgages, there has never been a better time to try to pay off your mortgage quickly. With interest calculated daily, there's money to be saved with every day by which you can reduce your term, and the earlier you start the more there is to be saved. So, if you fancy killing off your repayment mortgage in double quick time there are essentially two things you need to do: Firstly, you need to make sure that the amount you're paying for your home loan is as little as possible. This doesn't mean borrowing from one of those dodgy finance companies advertised on satellite TV, but simply making sure you've got a good deal with a reputable lender. Secondly, and this is where you can really make a difference, you need to throw as much money at your mortgage as possible. So, if you're up for the challenge, here's what you need to do: Step 1: Pay as little for your loan as possible Go and grab that mortgage documentation and check the rate you're paying at the moment. The Standard Variable Rate is the rate that your lender will move you to once a discount period is up. As SVRs can be as high as 6.75%, this will come as a very nasty shock to your bank account. To give you an idea just how much extra you could be paying if you had a 25-year, repayment mortgage at 4%, moving it to an SVR of 6.75% would mean your payments would leap by an extra £163 each month. Re-mortgaging to a better deal could therefore save you nearly £2,000 each year! Currently, around a third of us pay our lender's SVR. What's more, it's these borrowers that effectively fund the cheap deals the same lenders feature in the Best Buy tables! If you find you are currently paying your lender's SVR, or your introductory period is about to expire, you need to find yourself a cheaper deal. Unfortunately, a number of mortgages contain what's known as "lock-ins" which tie us to our lenders for extended periods. Find out if your mortgage has a lock-in period and if so, check out how much the redemption penalty would be if you moved to another lender. If it means paying hundreds or thousands of pounds you'll need to work out how much you could save by leaving to see whether it's worth it, or whether you'd be better off staying put until the end of the lock-in. One of the easiest ways to get a better mortgage deal is to phone your existing lender. Firstly, check out its website for details of the deals it currently has on offer (you'll find they're often aimed at new customers). Then, give them a ring and find out if they're prepared to offer you a similar deal as a means of keeping you as a customer. You'll need to think about whether you wish to take up a variable or fixed rate deal. The beauty of staying with your existing provider is that you should be able to save money on surveys and legal fees. However, if the deal your lender offers falls woefully short of what you had in mind, then move onto other lenders. Weekend newspapers are a good source, listing Best Buy deals of the moment in their Money sections. Remember to ensure the deals you look at are available for re-mortgages. You may find it useful to use a broker to find deals for you; however, many charge a fee (although as brokers can often offer deals that the general public don't have access to, you may find you re-coup any money spent). And remember to ask if he or she is "whole of market" to make sure you're offered the best deals on offer from all lenders. Check out the great deals from 11 of the UK's biggest lenders in our Mortgage Centre. If you have a large sum of cash in savings (such as a rainy day fund) you may find a current account mortgage or offset mortgage worth considering. Every pound you have can be used to set off against your mortgage to reduce the amount you owe - however, the cash is still there whenever you want it. Current account and offset mortgages can be useful for those with several thousands of pounds in savings but check the interest rates carefully. They can often be quite uncompetitive and you may find a standard deal coupled with overpaying will reap greater rewards. Fees and Charges Don't forget to take any arrangement fees and other charges into account. Avoid Higher Lending Charges and extended redemption penalties - find out more here. How Interest is calculated Check how the interest on your loan is calculated. Picking a mortgage that calculates interest daily ensures that every pound goes to work straight away. Mortgage term Many people fall into the trap,when re-mortgaging of forgetting to reduce their term. Don't simply sign up for 25-years again if you've been paying off your mortgage for two years already. And why not ask your lender what the repayments would be if you re-mortgaged for a lesser term (say 20-years) too? If you can make the payments you'll have instantly shaved an extra three years off your mortgage and, should you need to, most lenders will allow you to revert back to the original term. Loan-to-Value Ratio (LTV) Loan to value ratios (LTV) take into account the amount you wish to borrow, compared to the value of your home. Generally speaking the higher your LTV, the more expensive the mortgage deals you'll be offered so it really pays to reduce your LTV as much as possible. Any house price growth you experience will help a lot as this effectively means you "own" more of your home and will therefore reduce your LTV. Can I overpay/underpay? This is important if you wish to kill your mortgage debt quickly. Overpaying is a fantastic way to reduce the total interest payable whilst shaving years off your term at the same time. Smaller Mortgages Remember too, to take into account the amount you wish to borrow. Those with smaller mortgages may find that, after taking into account the fees and charges, re-mortgaging simply won't save much, and may actually cost money. Do your sums carefully - you may find that the cash you'd spend would be better off being used to throw at your mortgage instead! Step 2: Throw money at your mortgage Now you've reduced your mortgage rate and are paying as little for your loan as possible, it's now time to really throw some money at it. Firstly, assess your budget and see how much money you have left over at the end of each month. As long as your emergency/rainy day fund in place and you have a flexible mortgage, you can work out how much extra cash you can afford to pay towards your mortgage. Overpay every month One of the easiest ways to get extra cash into your mortgage is by overpaying each month. This can often be easily set up by simply giving your lender a call and means that the extra payments will go out automatically with your normal mortgage payments. To give you an idea how worthwhile overpaying can be, consider the example given earlier, of a 25-year, £100,000 repayment mortgage at 4%. Monthly payments would be around £527. However, overpay by just £50 each month and you'll save yourself over £9,000 in interest and shave three and a half years off your term. Overpay by £100, and you'll save £15,500 in interest and will have paid off your mortgage in just 19 years. And overpay by £200 and you'll save nearly £24,500 in interest and knock nearly ten years off your term. Blimey! Check the maximum your lender allows you to pay off as many stipulate no more than 10% of the total loan each year. And don't worry should you suddenly find yourself unable to make such large overpayments - you can generally give your lender a call to work out how to adjust them to a manageable sum. It's worth checking in advance though, and remember to follow up any phone calls with a letter signed by all borrowers to confirm any changes. Capital Repayments If you lender doesn't allow regular overpayments, ask if you can make capital repayments. Lenders often accept payments in £500 "blocks", but again may stipulate a maximum of 10% of the loan value each year. But make sure that money will go to work against your loan straight away - if it doesn't you may find saving it in a high interest account until the date it will be used against your mortgage is a better option. Reduce your term If your lender doesn't allow overpayments, or you've exceeded the 10% annual maximum, ask if you can reduce your term. This effectively achieves the same result as overpaying; simply make sure you know that you can meet the new payments. Raise some cash Finally, if you'd like to overpay but simply don't think you have the money to do so, why not cut back your spending in order to free up some cash? Find out how to become a money saving maniac, try our 25-quick money savings tips, or even try hacking back your tax bill. Follow these tips and you'll find you can potentially save thousands of pounds and shave years off the term of your mortgage. Imagine a life without your biggest debt - I'm sure you could think of a few uses for that extra cash! So go on, get to work - you could consider sorting out that mortgage an early New Year's resolution! Check out our Mortgage Centre