Most of us would like to keep the term (length) of our mortgage as short as possible – no-one wants to think of paying a debt up until our old age. Financially it makes good sense to keep the mortgage term as short as possible – the sooner the mortgage is paid off the less interest payable.
However, there are several things to consider before formally committing to the limit of your budget for the sole purpose of keeping the term as short as possible.
The down side to putting everything you have into paying off your mortgage is that it can be difficult to access these funds once paid in and the exercise is often timely and costly as it may involve re-mortgaging.
There are other ways to shorten the term allowing more flexibility that you may wish to consider…
Most mortgage products have overpayment facilities that allow you to make regular overpayments that will in effect reduce the term of the mortgage. There can be several benefits to this kind of arrangement.
Providing the chosen mortgage product has a regular overpayment facility then you can make overpayments that will in effect reduce the term of the mortgage and the amount you will pay in interest but if you find yourself short of money you aren’t obliged to make the higher payment.
If the product has the added benefit of a draw-down, you may also be able to draw from these overpaid funds if you find yourself in need of a cash injection. An offset facility could be a good alternative as well with the same kind of benefits.
Making regular overpayments is key to ensuring that the term is reduced. If you are not good at managing your money then perhaps this route is not the best for you.
Rather than committing all of your savings to reduce the term of your mortgage, it is good financial practice to keep a ‘rainy day’ fund that you can draw from if the worst happens, without affecting your mortgage payments and ultimately risking your home.
So in today’s unpredictable climate thinking outside the box can give you exactly the same effect as paying as much off your mortgage as possible without the risk of finding the barrel empty if the unexpected happens.
For more advice on mortgages or to speak to an adviser you can contact us on 0845 4594490.
Many people blame subprime mortgages for the credit crunch; others point the finger at merchant banks and hedge funds, whilst some have even suggested that China is directly at fault for the current state of Western finances.
To a certain extent, all these views carry some merit (particularly regarding the subprime mortgage sector). But another factor that comes into play regarding those mortgages; is perhaps more fundamental and likely to cause long-lasting damage.
Over the last decade and a half, the average house value skyrocketed. Some houses increased by as much as 100% in value over a decade. This rise in prices; sustained by a ready supply of credit on increasingly generous terms; increased demand massively, and due to the relatively fixed housing supply, the only place prices could go; was up.
That resulted in large numbers of people taking loans far beyond their means. It seemed that everyone could get a large enough mortgage to pay for a house regardless of their financial circumstances.
For those who have stretched their income, now is the perfect time to reduce your borrowing and save money in the long term on your mortgage repayments.
The new government and the recent emergency budget indicate we should see relatively low-interest rates for some time, although the bank base cannot remain this low forever.
So it is time to look at remortgaging, and trackers, in particular, can look like good value for money in the short term.
There are several ways to reduce your mortgage in this period of low-interest rates.
You can remortgage and reduce your mortgage term, but pay attention to how this will affect your repayments when rates do rise.
Another option is to look at offset mortgage products which allow you to pay no interest on the equivalent amount of savings held in the offset account; however, offset rates continue to be uncompetitive.
For many, the best way to reduce your mortgage may be to use a savings account and then use the typical 10% overpayment facility on most products.
It’s worth checking whether you have the right to make overpayments and to what extent. Savings interest rates aren’t too attractive currently, but banks like Santander offer some excellent deals on savings accounts that are worth a look.
If you’ve survived the bubble bursting; whatever state your finances are in, it may be a good idea to pay down any debts you have whilst interest rates are low and save what you can to give yourself a bit of a cushion; so should the situation deteriorate further, or if interest rates rise in the future, you are less exposed to increasing costs.
