Cut your mortgage costs

07 December 2010

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

Get the best deal

Shop around
Doing your research before signing up for a mortgage can save you a fortune. Make sure you compare the whole of the market before signing up for a mortgage.

Whatever you do, don’t just go straight to whichever bank you have your current account with – you could end up paying thousands of pounds more than you need to, for longer than you need to, by not shopping around.

Get free advice
There are plenty of mortgage brokers out there that are happy to offer you free mortgage advice. They may also have access to exclusive deals that you cannot get your hands on direct.

But always make sure that your broker is whole of market, and does not just deal with a panel of lenders, as they may not be able to get you the best mortgage for your needs.

Sort out your credit rating
Post credit crunch, it’s tough to get a decent mortgage without a great credit rating. So before you apply for a new mortgage, check your credit report. There are a host of things you can do to improve your credit rating, including ensuring you are registered to vote at your present address. Be sure to read How to improve your credit rating.

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Use your savings

Get an offset deal
An offset mortgage uses your savings to help you reduce how much interest you pay on your mortgage. So if you have a £100,000 mortgage, but £20,000 in savings, you’ll only pay interest on £80,000 of your debt. You can then choose whether to reduce your monthly mortgage payments, or pay off the mortgage early.

You can even get a current account mortgage, which allows you to link the balance in your current account as well as your savings and mortgage to reduce how much you pay. You also save paying tax on those savings, which is a fantastic plus if you are a higher rate taxpayer.

Cut your loan-to-value
The best mortgages go to those with the biggest deposits. So get saving to bump up the size of the deposit you can hand over in and make sure you don’t get lumbered with an expensive deal.

If you are lucky enough to already have a lot of savings at your disposal, then use as much of them as you can afford to as the deposit, as it will save you a fortune over the term of the mortgage.

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Cut the cost of your monthly mortgage payments

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.

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.

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.

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, some 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 you will need to have a plan to put aside money 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.

Fewer lenders are offering this type of mortgage now, with many requiring a sizeable deposit and concrete proof of how you are going to repay the capital, so it's far less of an option than it used to be.

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Cut the cost of your mortgage in the long-term

Make overpayments
Overpaying will significantly reduce the amount of interest you have to pay throughout your mortgage term, saving you thousands over the long term. Contact your lender to alter your repayments. Most lenders allow you to overpay by 10% a year without penalty. This also helps you build up your equity to protect you from negative equity.

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.

Remortgage when your deal comes to an end
When the initial period of your mortgage finishes, don’t just sit on the Standard Variable Rate – shop around for a new, cheaper deal. However, don’t remortgage too early as you will be hit with early repayment charges which could total many thousands of pounds.

Go for a long-term deal
If you go for the stability of a longer-term mortgage, say for five years, then you will not only save the hassle of shopping around for a new deal every couple of years, but you will also avoid the arrangement fees you would have to fork out for the new mortgage.

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Slash your spend on fees

Pay the arrangement fee 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.

Never miss a payment!
Many lenders slap borrowers with a monthly fine if they fall into arrears or are late with a payment – in some cases more than £100 just for a letter to inform you that you have fallen into arrears! Make sure you set up a direct debit to pay your mortgage each month, and always ensure there is sufficient cash in there to cover your bill.

Missed or late payments are also a terrible thing to have on your credit record, so do everything you can to avoid incurring one!

Avoid early repayment charges
Don’t sign up to a remortgage before your initial period has come to an end or you will likely be whacked with a hefty charge of many thousands of pounds.

You can also be hit with an early repayment charge if you overpay by more than your lender allows so make sure you know just how much you can overpay before increasing your payments.

Don’t pay more than you have to for a valuation

Valuation fees vary enormously between lenders. Most lenders operate a sliding scale for fees based on the property's price, but their tiers are all very different. As well as having tiers for standard valuations they may also have additional costs if you want to upgrade to a Homebuyers Report or full survey through them.

And when you get a valuation, some lenders also charge an administration fee for this service! Be sure to include these fees when researching which deal is cheapest for you.

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