Though the average home costs £162,000, over the course of 25-year mortgage you could end up paying much, much more than this. We show you four ways to reduce your mortgage costs.
The average UK house price, according to the Halifax House Price Index in December 2004, stands at £162,000. However, you'll end up paying a lot more than that over the course of your mortgage. In fact, if rates were to rise by just a few percentage points, you could end up paying £442,000 for the average house!
Now, you may be feeling smug at the Bank of England's decision to hold interest rates at 4.75% for another month. It's certainly good news for the millions with variable rate/tracker mortgages. But how affected would you be if interest rates went up to 8%? 10%? 15%?
Interest rates haven't been as low as we've seen in the last few years since the sixties. Bearing in mind rates were as high as 14% only 15 years ago, what's the likelihood that they won't change significantly over the next 15 or 25 years?
If you took out a 25-year mortgage at 6% interest today for £162,000, you'd pay £1,044 a month. This means you'll pay back a total of £313,000 over the next 25 years - i.e. nearly double the amount of your initial loan. So for every pound you borrow, you'll need to pay back roughly two.
But taking an average interest rate over the same period of 10%, that same loan will now cost £442,000. That's an extra £129,000 in interest, and nearly three pounds you'd need to repay, for every pound borrowed.
And the numbers get even scarier if you look at an average interest rate of 15% - £622,000, or almost four pounds for every pound.
There's no need to despair at these frighteningly large numbers though. If you can reduce your loan by paying off your mortgage as quickly as possible, you will limit the length of time you're exposed to interest rate fluctuations, and thus reduce the amount of interest you pay your mortgage lender.
There are many options to do this, but the critical thing that most involve is paying a bit more into your mortgage now:
1. Re-mortgage
If you re-mortgaged a £100,000 loan from a standard variable rate deal, for every 1% reduction in interest rate, you'd save about £1,000 a year!
2. Overpay
Overpaying just £50 a month on that £100,000 loan at 6%, will knock almost four years off your term, and save you £16,000 in interest. If you've reduced your monthly payment by re-mortgaging (and your mortgage lender allows overpayments without penalty) don't get used to the extra money, why not use it to overpay each month instead? Try using this Overpayment Calculator to see what you can save.
3. Reduce the term of your mortgage
If you're re-mortgaging after your first two years, instead of asking for a 23 year mortgage, why not go for 20 years? On that 100,000 loan at 6%, it would only cost you another £48 each month, but would save you 3 years, and £12,650 in interest.
In fact, taking a shorter mortgage is similar to overpaying. The main difference being that overpaying gives you more flexibility, as you can reduce your payments at a later date if required.
4. Switch to a Current Account /Offset Mortgage
If you're someone that only feels really secure if you have 6-12 months salary in the bank, make the most of it and use it to offset your mortgage costs/reduce your term in a Current Account/Offset mortgage. These are also great for consolidating any loans you may have.
Most of these options will lessen your loan term, and all will save you money. Take a look at our mortgage section for details of our mortgage competition and to start reducing the your mortgage costs today.
