Ways To Pay Off That Mortgage Earlier
If interest rate rises fill you with fear, why not follow these tips to pay off that mortgage years earlier?
If, like me, you've been watching "Did They Pay Off Their Mortgage In Two Years?" (BBC2 Thursdays), you'll know that the show focuses on a number of couples/families whose aim has been to kill off their biggest debt in a mere couple of years.
By cutting back on spending and utilising any skills they have, the aim is to reduce expenditure whilst increasing income as much as possible in an effort to pay off their outstanding mortgages. And while a lot of sacrifices have had to be made by the families involved, the ultimate goal of a mortgage-free life is clearly worth it.
Indeed, with three interest rate rises since August last year, we're all feeling the pinch and those with variable rate mortgages have suffered even more. What's more, anyone who had hoped to remortgage to a fixed deal, but failed to snap up a cheap rate before the latest shock rise will be faced with an increasing plethora of uninspiring offers with shockingly high arrangement fees, as lenders rush to pull the cheap deals.
If, like the families featured on the show, you'd like to pay off your biggest debt as quickly as possible, but you're not necessarily willing to undergo too much in the way of sacrifice to get there, there are a couple of things to try that hopefully won't impinge on your lifestyle too much:
Do you have a lot of cash savings?
- Fools with large amounts of cash savings
- Fools with decent sized rainy day funds
- Self employed/contracting Fools with volatile incomes
If you're one of the above, chances are you have a fairly hefty sum stashed carefully away earmarked for (i) Emergencies (ii) The taxman (iii) Just because you like the peace of mind a large sum of easily accessed money can give.
However, an alternative method of getting the most from a lump sum is to use it to offset your mortgage.
One of the best things about modern mortgages is the fact interest is calculated on a daily basis, so every pound you can throw at your home loan will go to work, straight away.
Savings rarely earn as much as loans charge and by saving this cash in an account linked to your home loan, it could work to reduce the debt by that portion. Your money won't earn any interest but it won't be taxed, either, and by saving the interest you would be paying on that portion of your mortgage you could gain far more.
Put simply, £10,000 in a savings account paying 5%AER would earn £500 after one year, which, after tax would leave a higher rate taxpayer with £300, and a lower rate taxpayer with £400.
If you were to use that money instead to offset your mortgage (charging 5.5%) it would have saved you £550 in mortgage interest -- meaning you can pay down that home loan more quickly.
Offset mortgages are a good option for those that would like to pay off their mortgage faster, but have no extra income to throw at it. By re-distributing savings you already have you will help to reduce that debt. What's more, some mortgage lenders (such as Intelligent Finance) even allow borrowers to offset their mortgages with cash ISAs -- great if your rainy day savings are held in an ISA as the money will retain its tax free status (even after the mortgage is all paid off!).
You could even take it one step further by remortgaging to a current account mortgage (CAM) which additionally uses the contents of your current account to work to reduce your mortgage debt -- great if you regularly have a high balance.
Many flexible mortgages have the option of an offset facility, which is essentially an account into which you can deposit your savings, so it's worth finding out if yours offers that option.
Alternatively, if you're thinking of remortgaging to an offset mortgage, as always look for a flexible product with a good rate. Although offset and CAMs have had some bad press in the past, rates have become far more competitive in recent months.
To give you an idea of the types of rates on offer, our Mortgage Service currently has a fixed offset deals at 5.4% (fee £549) until 31/12/08, and a tracker offset deal at 5.35% (Base rate +0.1%) until 31/3/09 with a fee of £799.
Could you increase your monthly payments?
- Fools with a regular monthly income
If your income is pretty straightforward and you know that there's a decent sum left over at the end of each month when all the bills have been paid, why not consider overpaying your mortgage?
In my opinion, this is one of the best ways to pay off your mortgage early, as even a small sum, paid regularly can effectively hack away at that debt. Overpaying by just £50 per month on a £100,000, 25 year repayment mortgage at 5% could save over £12,250 in interest and shave over 3½ years off the term.
What's more, most modern mortgages allow borrowers to overpay by a certain amount each year (typically 10% of the loan) with no penalty, so a lot of homeowners could benefit from overpaying their mortgage with minimal effort. It's therefore worth checking with your lender regarding the details of yours.
If you are remortgaging, do watch out for those arrangement fees. Those with smaller mortgages in particular may find that a slightly higher rate with a lower fee could save them money when compared to a cheap rate with a sky high charge.
And on a final note, why not follow the examples set on "Did they pay off their mortgage in two years?" and try to maximise your income (legally, of course!) while minimising spending? Throw that extra money at your mortgage and who knows how soon you could be mortgage free!