Want to be a happier homeowner? Then avoid this trio of common clangers!
Around seven in ten of the UK's 25 million households are owner-occupied, which comes to about 17½ million properties. Of these, around 11½ million are mortgaged to some extent.
When you ask homeowners what they'd do with a sizeable financial windfall, many will reply, "Pay off the mortgage, of course!"
The fact is that millions of homeowners see their mortgage as more of a burden than a blessing. Okay, so it gets you on the housing ladder, but it does hang around your neck like a dead weight for 25 years or so! But few homeowners make the most of the opportunity to lighten their load by being cunning with their mortgage. Here are three everyday mistakes that homeowners make:
1. Sticking with the same loan or lender
No, no, no, no, NO! If you're not locked into a special-rate deal (in other words, you can switch loan or lender without a massive penalty), then the world's your oyster. There are over eight thousand home loans out there waiting for your customer, at least one of which would be perfect for you.
The first - and usually the cheapest and simplest - step is to demand a better deal from your existing lender. By switching loans but staying with the same lender, you can avoid a whole range of charges, such as legal and valuation fees. Visit your lender's website for details of its latest offers for existing borrowers, then call it or visit your local branch to explain that you're on the lookout for a better rate.
If your lender refuses to produce a better deal, then remind it that there are around 150 lenders who will! Then again, most lenders have a 'mortgage retention team', whose job is to stop existing borrowers from jumping ship. When you ask for a settlement figure or redemption statement, your lender will usually sit up and pay notice, because it won't want to lose you - if you've been a good payer, of course!
If you think the grass could be greener elsewhere, study the Best Buys in the newspapers, Teletext or online. However, read the small print before plumping for a new deal, as lenders often manipulate their charging structures to get into the Best Buy listings. The best way to compare home loans is to add up all the costs - one-off and ongoing - over a defined period, such as three years.
2. Buying over-price mortgage insurance cover
After you've found a Best Buy mortgage, don't sit back and put your feet up. Sadly, your mortgage-related insurance policies are probably rip-offs, too. Pruning your premiums could save you a grand a year or more, so give these policies a thorough price-check:
- Life insurance, especially when bought on the high street, is far too costly. By shopping around, you could halve your premiums, which could save you, say, £30 a month over 25 years, which is a lot of moolah! The same applies to income protection and critical illness insurance.
- Buildings and contents insurance is also dear; swapping your policies for Best Buy cover could save you around £150 a year every year - another mighty saving.
- Mortgage payment protection insurance is optional accident, sickness and unemployment cover for your mortgage repayments. The cost varies enormously, with high-street lenders providing the most expensive cover. You could pay £200 a year for a Best Buy policy, compared to £500 or more from major mortgage lenders.
3. Not overpaying
A £100,000 repayment mortgage over 25 years at an interest rate of, say, 6% would cost £644 a month. So, over 300 months, the total cost would come to £193,290 - the original £100,000, plus £93,290 in interest. So, in this example, we pay back around £1.93 for every pound borrowed.
However, making regular overpayments can slash thousands off your interest bill and the time taken to repay your mortgage, especially if you have a flexible mortgage. As this overpayment calculator demonstrates, an additional payment of £50 in the above example reduces our interest bill to £77,280 - a saving of over sixteen grand. Furthermore, this overpayment shortens the life of our mortgage by over 3½ years, which means 3½ years more freedom!
Paying off your mortgage is one of the best risk-free rates of return around. Overpaying a loan charging, say, 6% a year is equivalent to earning a tax-free rate of 7.7% for a basic-rate (22%) taxpayer. For a higher-rate (40%) taxpayer, this risk-free, tax-free rate is equivalent to 10%, which is practically unbeatable!
Good luck on your journey to mortgage-free living!
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