Ultimate Guide to a Cheaper Mortgage

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A mortgage will be the most expensive “purchase” in your life, so even a small percentage savings can mean thousands of extra pounds in your pocket. It’s therefore worth spending time trying to reduce your repayments.

The average house price in the UK is now £243,168 so we are talking really big numbers and potentially really big savings. For example, a Santander customer with a £150,000, 25-year loan will be forced to find an extra £42 per month – £504 a year — thanks to the 0.47 per cent interest hike that occurred this month (Oct 2012). Imagine, less than half a per cent can make a £500 a year difference in your bottom line.

With this guide you could save this plus thousands more on your current mortgage. Or you can look for a great deal from the start, if this is your first time shopping around for one.

Note: Covering mortgages thoroughly and completely is a financial advisors job, but this guide is a good intro into where you can save the most whether you need a new mortgage or a remortgage.

What Kind of Mortgage is Right for You

Repayment mortgage

A mortgage which allows you to repay it over a period of time is a repayment mortgage. You pay an amount each month coupled with the interest of the loan. And the amount of interest that is paid over the years decreases as the amount of capital repaid in increased.

Interest-only mortgage

These types of mortgages carry a bit of risk with them, you never paid off the capital (the amount you borrow). Which means at the end of the term you will still owe the original amount. If you took out a 25 year mortgage the chances are that your home will have appreciated in value so you could either sell your home and buy a smaller house/flat, or you will be forced to take out a brand new mortgage.

Endowment Mortgage

Endowment mortgages are a bit tricky, we recommend you consult a professional about these, but in the meantime, this is the low down:

Endowment mortgages work similarly to interest-only mortgages except they are attached to an additional savings plan. Your monthly contributions are made to a life insurance policy that is set to pay off the mortgage, if you die before the endowment matures. However, there are risks involved if the endowment doesn’t perform as expected. And while you can make additional payments to it, they don’t guarantee there will be enough money there to cover the cost of the remainder of the mortgage in the case of your death.

With traditional mortgages, you have an agreement with the lender. But with endowment mortgages, you’re in an agreement with the lender and the insurer. This kind of borrowing comes with a host of disadvantages, but the advantages are: 1) the mortgage can be transferred to another property and 2) you could end up paying off early and taking a lump sum – IF your plan ends up performing better than expected.

A bit tricky, eh? Yeah, we thought so…there’s a lot more to endowment mortgages, but this is a quick idea of how they work. If you’d like to dig deeper into them, check with your lender for more information.

Offset mortgage

This is the best kind of mortgage. It is offset by your savings, not by taking away from it, though.
For instance, if your mortgage is for £100,000 and you have £10,000 in your savings, your repayment amount would be based on a £90,000 loan, saving you a total of £400 at the end of the year.

Islamic mortgage

An Islamic mortgage is sort of a capital-only type mortgage. You’ll only repay the amount of the loan without any interest applied to it. In some cases, the lender actually owns the property until your “rent” pays off the property or they may charge you an upfront fee for the loan, rather than an interest rate.

Tracker Mortgage

Tracker mortgages follow the Bank of England Base Rate, so if the Bank raises its rate, your mortgage payment goes up. Additionally, if the Bank lowers its rate, your payment goes down, too.

Some loans may cost you more each month than others. But they may actually save you money at the end of the term.

For example, a loan that costs you £869 month is hard to bear, but it may save you £1000s at the end of your mortgage.
Weigh what you can live with financially before signing on the bottom line of any loan.

Buying Guide

Determine your budget for monthly repayment of a home

To start off with do a simple budget sheet in Excel (or steal ours!) and determine what you pay out each month, and what you bring in. Calculate what’s left. Use the Miscellaneous section to factor in monthly savings on things that are not regular monthly payments, like clothes, haircuts, etc.

Monthly expenditure / income
Rent
Power
Water
Internet
Credit repayment
School fees
Groceries
Miscellaneous
Total out =
Monthly income
Total in =

Total In – Total Out = Your Monthly Budget Available

Your rent, of course, will be exchanged for your mortgage repayment, but you’ll see if you can add more to that number in your budget or if you’ll have to stay within the confinements of your current housing budget.

Once you know what you have available to spend on your home, then you can decide on what kind of mortgage will make your wallet Happier.

Use a mortgage calculator

Now that you know what your budget is and what kind of loan to look for, use mortgage calculator to find out what size of loan you can afford.

If you make around the national average of £26,200 (according to the Office of National Statistics) and your monthly expenditure is £1000, you’ll be able to borrow £59,640 to put on a home.

Where to get a mortgage

Some people, like first time buyers and key workers qualify for some funds from government-backed resources, but you’ll need you borrow to the remainder of the money from other sources like:

  • Building societies
  • Banks
  • Insurance companies. They only provide endowment mortgages (see above)
  • Large building companies might arrange mortgages on their own new-build homes
  • Finance houses
  • Specialised mortgage companies.

There are loads of options when it comes to finding a cheaper mortgage rate. You needn’t check online only, but we suggest hopping online and checking out the comparison sites below first, then you can check your local lenders to compare.

Mortgage comparison sites:

At the time of this writing, Happier found Money.co to have the best interest rates, but be careful that you make sure you get rates that apply to mortgages, not remortgages (unless that’s what you’re shopping for).

And those 2.79% looking so enticing, but you need to keep in mind as you’re shopping is what those promotional rates will go to and when. Which loan is going to give you the longest on the promotion or which will go to the lowest rate when the promotion is over. So you now know when to look for a mortgage (after you’ve figured your budget), how to get an affordable mortgage and where (at online comparison sites like Money.co.uk or the like).

How to reduce your mortgage

Put down a big deposit

Most loans have a max that they will lend based on the type of loan you take out, so you’ll be required to have a minimum deposit available. But the more you add to that amount, the more equity you’ll have in your home and the less you’ll owe each month.

For example, if a mortgage you’re looking at offers a manageable repayment amount on a loan at 4.2% with 25% down, you can lower that monthly repayment by putting down more than the required 25%. In some cases, you may be able to negotiate a lower interest rate, as well.

But, most first-time buyers look for a 90% loan-to-value mortgage. And those loans carry higher interest rates, meaning you’ll pay a lot more for your home than it’s worth.

Try to put down as much as you can to get the lowest rates and repayments.

Shop around for the best rate possible

Your interest rate is what tacks on the most to your repayment and can make your payments go from manageable to unbearable. Currently, the rate is sitting around 4.7%, so if you can grab a rate that’s lower, you can save thousands over the course of your loan.

Remortgaging

Remortgaging your home can make the difference between throwing money away and tucking it away. Lowering your rate by a half per cent lowers your payment and the total amount you’ll repay.

For example, if you currently owe a £100,000 mortgage at Santander’s current rate of 4.74%, you’ll repay £569.54 a month — totaling £170,862 at the end of the term. And lowering your interest rate by a half per cent makes your payments £541.74 a month. Yes, it’s only a £28 pound savings each month, but over the course of the term of the loan, you’ll repay £162,522 — a savings of £8,340!

If you’re paying 5% to 6% on your current mortgage, and find a lower rate, you can switch to that lower rate to literally save £100s each year — and that means £1000s over the course of your loan.

And if you qualify for a Halifax loan that can lower your rate to a whopping 4%, you can lower your monthly repayment to £527.84, making your total repayment £158352!

Less than a per cent point, can save you over £12K! (Not to mention, the fact that your monthly repayment goes down almost £42.)

Overpaying

Overpaying each month is a powerful way to save in the end. You’ll be paying out more each month, but at the end of your mortgage, you can save over £11,000 on a £100,000 mortgage at 4.5 per cent by paying an extra £100 each month.

In other words, if your monthly repayment must be a minimum of £556 an you pay £656 each month, you’ll save not only over £11,000, but you’ll save almost 4 and a half years, paying it off in 21 years instead of 25!

Check the overpayment calculator at HSBC for more information on your mortgage repayment savings: https://mortgages.hsbc.co.uk/overpayment-calculator

If you can’t afford to make extra payments each month, consider making a large lump sum payment toward your principal with any gift money you receive, work bonuses, or other “found” money you don’t expect. Check with your loan official to know if that’s a possibility for your particular mortgage.

**Overpayment is a sneaky and great way to get Happier, but don’t forget, you MUST make sure that your mortgage allows for it. Some loans carry a hefty penalty for early repayment.

Consider paying down other debt first

A typical mortgage is 5%, while a credit card is 20%. So before paying down your mortgage pay off your more expensive debt first.

Rent out your room and benefit twice

If you’re using that third bedroom as a storage closet, rent it out. You can earn up to £4250 per year — tax-free. Take your rent and apply it to your mortgage and knock off years and £1K’s off your mortgage!

**Be aware: some mortgages require you inform them about your intent to let and it may increase your loan terms so double check with your lender to know what the case is for your property and visit https://www.gov.uk/rent-room-in-your-home for more government information on the legalities to find out what you’ll be responsible for.

How to get out of Mortgage Debt

If you’re already in mortgage debt and are struggling to meet your payments here are a few ways you can implement to pull yourself back into the black (as much as possible with a mortgage and other debt!):

  1. Negotiate a lower monthly payment with your lender. Discuss your situation with them and let them know that your goal is to pay off your debt, but you need to find a more suitable arrangement to help you do that. Will they oblige? Maybe. Maybe not. But it doesn’t hurt to ask. 
  2. Claim on your mortgage payment protection insurance. If you have mortgage protection insurance, consider claiming against it. Be aware that this may effect your policy terms, but if the results are something you can live with, then use it to make your repayment more bearable. 
  3. Reduce or stop payments on your endowment policy. You will have to make up these payments at a later, but in the short term, it may make your paydown a bit quicker.
  4. Consider a sale and rent back scheme. Renting out an empty room in your apartment and applying that income to your mortgage can drastically reduce your debt woes. 
  5. Consider a mortgage rescue scheme. People in a housing association property can get help from the government if you’re in danger of losing your property because you can’t meet your payments. 
  6. Increase your income. Easier said than done, but you can increase your monthly income by taking a second job, asking for a raise, or taking up a hobby that pays (like answering surveys online).
  7. Reduce your expenditures. Use a budget to know how much you’re spending and on what so you can trim out what you’re spending on that you don’t need. 
  8. Sell your house. The last resort of last resorts is to sell your home. No one ever wants to do that, but if you’ve gotten in so deep that the above solutions don’t help, it may be your only hope.

Conclusion

Getting a mortgage you can afford means knowing what that number is before you start. It also means considering the best type of mortgage for your needs (don’t forget that Offset Mortgage savings!), and getting the best deal around by shopping for the best mortgage rates.

But if you want to save the most possible after getting that low-rate mortgage, then consider these ways:

  1. Switch to a cheaper mortgage provider / deal
  2. Maybe an offset mortgage is a better solution for you
  3. Consider making a large deposit – this will give you a better rate because you are a safer bet
  4. Make overpayments – this will shorten the time to repay the mortgage meaning you pay less interest in total
  5. Letting a room in your home to help with your overpayment

You can literally save thousands of pounds by keeping your eyes on the interest rates and remortgaging where necessary. So don’t be afraid to pay £1000 to remortgage what will save you £10K more!

If you are struggling to pay your current mortgage you can also consider this more extreme measures:

  1. Ask you mortgage provider if you can cut down your monthly repayments – they would prefer some money instead of you no money
  2. Claim on your mortgage payment protection insurance – if you have any
  3. Reduce or stop payments in your endowment policy – you will have to make up these payments at a later date but this can help get you out of a hole in the short term
  4. Consider a sale and rent back scheme
  5. Consider a mortgage rescue scheme – if you are in a housing association property
  6. Increase your income – never an easy thing to do, but you could ask for a raise, take a second job, or looks for a higher paying job. Also consider selling unwanted belonging on ebay to raise some short term cash.
  7. Reduce your expenditure elsewhere – can you cut back on other things? e.g. mobile phone, Sky TV, takeaways, clothes, car, etc.
  8. Sell your house - The very last resort is to sell your house and pay of your mortgage debt but if you try all the tactics above first hopefully it won’t come to that

Get savvier and get Happier!

Further reading:

Where to find independent financial advice:

 

 

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