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
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 lay the blame for the credit crunch firmly at the feet of the sub-prime mortgage sector, others have pointed 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 of these accusations carry some merit (most particularly the one regarding the sub-prime mortgage sector) but there is another factor that comes into play regarding those mortgages which is perhaps more fundamental, and likely to cause more long-lasting damage.
Over the last decade and a half the value of the average home has sky-rocketed. Some houses increased by as much as 100% in value over a decade. The rise in prices was largely sustained by a ready supply of credit, this increased demand massively, and as there is relatively fixed supply when it comes to housing, the only place that the price was going to go was up.
This resulted in large numbers of people borrowing on houses that were far beyond their means, it seemed that everyone could get a large enough mortgage to pay for a house regardless of what their particular financial circumstances were like.
For those people who have stretched their income now is the perfect time to reduce your levels of borrowing and save money in the long term on your mortgage repayments. The new government and the recent emergency budget indicate we are likely to see relatively low interest rates for some time to come although bank base cannot remain this low forever.
It’s therefore a good time to look at remortgaging and trackers in particular can look like good value for money in the short term. There are several ways you can reduce your mortgage in this period of low interest rates. You can remortgage and reduce your mortgage term, although you should 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 a little uncompetitive.
For many the best of way of reducing your mortgage may be to use a savings account and then make use of the typical 10% overpayment facility offered by most mortgage lenders. It’s worth checking whether you have the right to make overpayments and to what extent but the majority of products do allow this. Interest rates aren’t particularly attractive at the moment but banks like Santander are offering some excellent deals on savings accounts that are definitely worth a look.
If you’ve survived the bubble bursting, whatever state your finances are in, it’s important that you pay down any debts you do have whilst interest rates are low, and save what you can in order to give yourself a bit of a cushion should the situation deteriorate further, or if interest rates rise and your mortgage costs a little more in the future.