Sign in Register

Hide tasks (5)

Hide tasks

How-to Guides » OLD GUIDE Cut your mortgage costs

Find out how to cut the cost of your mortgage by hundreds of pounds a month and become mortgage-free years earlier.

Tasks

OLD GUIDE Cut your mortgage costs

Cut the cost of your monthly mortgage payments

How-to Guide Tips 7 tips on this task | Tweet

1) Go interest-only
Most mortgages work on a capital repayment basis, so you pay off both the capital you owe for the house, and the interest, in a single payment each month. However, most lenders will allow you to only pay the interest each month, something which will dramatically cut the amount you pay each month.

However, at the end of the mortgage term you will need to hand over the capital you owe, so it pays to put the money you would be paying each month into the mortgage into an investment vehicle, such as an ISA. However, it’s a gamble as you may get to the end of the mortgage term and face a shortfall.

2) Remortgage to a cheaper deal
Don’t just sit there on your lender’s standard variable rate once you get to the end of your initial mortgage period, as chances are you will be forking out more than you need to. Instead, shop around for a remortgage deal which could save you money each month.

3) Pay your fees upfront
If you add your fees to your mortgage, you’ll pay interest on them for the rest of your mortgage term – which will cost you more overall. When you take out a new mortgage, pay the fees upfront and eliminate this cost.

4) Take a mortgage payment holiday
Taking a mortgage payment means that your capital repayments are put on hold for a fixed period of time. However, be warned that the interest you skip is added to the mortgage, increasing the amount of capital you owe your lender. Each month a payment is missed, the interest charged is higher because your outstanding loan escalates during the break.

Compare mortgages at lovemoney.com

Enjoyed this? Show it some love

Tweet this

Retweet

Comment on this

Facebook

Twitter

General

Tips on this task (7)

1

Soodie said

If you take an interest only mortgage, make sure you will have the means to pay off the loan at the end of the term. If you can overpay then I would recommend that you do. I would also recommend taking out an ISA index tracker fund to pay off any remaining balance at the end of mortgage term.
If you only pay the interest and don't make any provision to pay off capital amount at the end, you will probably have to sell your home to pay it off - not good, unless this was your plan in the first place!

Report on 20 November 2009 | Love 0 love
1

DLJM said

If at all possible, convert your mortgage to a repayment scheme so that you repay and reduce the capital with each monthly payment. It's a more effective way of reducing the overall sum.

Report on 13 January 2010 | Love 0 love
1

richardkeys said

There is no point in having an interest only mortgage unless you can earn more interest on your savings than the interest on the mortgage. If you earn 3% on your ISA but your mortgage costs you 5% interest, then you lose out on interest only payments. You should be paying off the interest as well.

Report on 09 February 2010 | Love 0 love
1

richardkeys said

Sorry! Imeant interest and principal as well!

Report on 09 February 2010 | Love 0 love
6

johncolescarr said

Interest only mortgages should only be used if you need to reduce your monthly payments to get back on your feet, like repaying higher interest debts for example. use only as a lat resort.
It is quite unlikely that you will make more interest in Cash ISAs than in paying off your mortgage. Plus you can only save 3600/5100 a year. An arguably better strategy is to overpay your mortgage unless you can earn more in cash ISAs. And remember that once your ISAs are full, think carefully before paying into a normal savings account as you will have to pay tax on the interest, unlike repaying our mortgage. As a rough guide, multiply your savings rate by 0.8 if you are a basic tax payer and 0.6 if a higher rate. If your mortgage rate is higher than this figure then repay!

Report on 16 March 2010 | Love 0 love
0

themagus said

Reading the above it strikes me that the advice given is for those with money left over at the end of the month. Not everyone has that luxurious situation especially if they have only recently bought a house, got through redundancy or accumulated debt over a period for other reasons....so locking into repayment deals are fine where the latter does not apply.
For people who have significant debt on 0%credit cards and personal loans there can be very little left out of their minimum monthly repayments to service capital repayment on the mortgage. I agree with the theory that repayment is the safest plan to reducing the mortgage but by taking out a good 1-2 year discounted deal and eliminating loans and credit cards balances over that period people can effectively unlock their debt cycle and liquidity issues.
Aside from that no one seems to mention that a company pension can be put forward as a valid repayment vehicle (tax free lump sum) or as part of a savings/repayment strategy to take the interest only route for a while. Many employers offer matching of contributions of up to 6% which can increase overall annual contributions by 12%! Therefore ISAs seem a poor choice compared to this IF available to you.
The first priority once taking up an Interst Only deal should always be to clear immediate credit card balances and deal with unsecured debt to break the debt cycle. Once this is achieved SAVE some money before making further significant purchases and then enjoy the luxury of making overpayments to the mortgage. That is the recipie for a healthy budget and workable route out of any debt bottleneck. For most hopefully after a couple of years the idea of coping with a repayment mortgage can be entertained but from a much better starting point !

Report on 18 May 2010 | Love 0 love
0

Helen1971 said

I totally agree with the above 3 posters: I took out an interest only mortgage when I got divorced as that was the only way I could afford to keep a roof over mine and my 3 children's heads. I was confident that after a couple of years my income would improve and I could start overpaying my mortgage. About 3 years ago I managed to find a fixed rate savings account that was paying about double what my mortgage was charging (just before the interest rates started to drop!), so I saved any spare money in that, and once that rate finished and I couldn't find another account paying more than my mortgage was charging, I paid those savings off my mortgage.
When I took out my mortgage, I made sure that it did not have any early repayment penalties, and now savings rates are so poor I am overpaying my mortgage to repay capital as well as the compulsory interest. I have not officially converted my mortgage to repayment as that would incur an administration charge of approximately £100! I have instructed the Building Society to make my direct debit a fixed amount, so there is no question of me just hoping that there will be money left at the end of the month to put towards my mortgage - it is automatic, and I don't even have to think about it.
If you have an interest only mortgage and are not sure how much you should pay to ensure that you have paid off your mortgage after 20 years, or whatever your remaining term is, use one of the online calculators that are available, using your interest rate and 'repayment' as the type of mortgage.

Report on 14 October 2010 | Love 0 love

Post a tip

Sign in or register to post a tip.

Most popular tipsters

W3C Thank you for using Three Kings