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.
An offset mortgage has a linked savings or current account, and rather than receiving interest on money paid into that account; you don’t pay interest on the same balance of your mortgage.
You can typically set an offset facility to work in one of two ways. It can either; act as an overpayment facility reducing your mortgage term or reducing your monthly payment.
The main benefit of using an offset account against overpaying your mortgage is that you can readily access the funds in the future without having to refinance; although this would affect your payments or term.
You can also use it to borrow money in advance and only pay for it when you take it out of the offset account; however, you must consider how borrowing extra money will affect interest rates, loan-to-value and arrangement fees.
Offset isn’t technically a type of product, so you can still get all the usual types of rates with an offset facility such as fixed, discount and tracker deals, for example.
The main thing with any mortgage is to make sure any additional cost you pay to get this option justifies the benefits you receive. That’s something we can consider for you in the advice process. You can get more information or to get expert advice on offset here.
Mortgage Broker Q&A; what’s an offset mortgage?
In Q&A, we look at some of the questions mortgage advisers answer; on a day-to-day basis. Question; what is an Offset Mortgage, and how could one save me money?
Offset Mortgages have lessened in number thanks to the credit crunch, but for some people, they could still represent a very effective way to save money on mortgage repayments.
In an offset mortgage, a savings account is retained with the lender, and any balance in that account; will offset the outstanding mortgage amount.
The savings earn no interest, and none is owed, on the equivalent balance, of the mortgage.
The benefit of this is that mortgage interest rates are generally above savings interest rates, as this difference is the premium or margin the lender will make for the loan.
You are also taxed at either 20% or 40% on your savings interest (unless you don’t pay tax, but let’s assume you do if you have a mortgage).
That means that if you could get a savings rate of 3.5% gross, and your mortgage was 4.5%, for example, then the real return on your savings would be either 2.8% or 2.1% after tax.
That would mean for every £1000 in the offset account, you would be better off by either £17 or £24 a year in this scenario, and your mortgage payments could be reduced: by £45 per £1000.
But it doesn’t end there; you can usually choose for the offset either to; reduce the term of your mortgage or your monthly repayments.
If you reduce the payments but deposit the savings into the offset, the balance will increase, accelerating the reduction of your interest payments; increasing savings month on month.
But, it also can be used as a way of effectively paying lump sums off a mortgage with the added benefit that these can be easily accessed should you have a rainy day.
For more information on offset mortgages, call a mortgage advisor on 0845 4594490 for advice.
The Woolwich has announced a new tracker at 1.48% above the base rate for the first year, reverting to 2.49% above the base rate for life, giving their lowest-ever headline mortgage rate of 1.98%; currently.
The product has a minimum loan of £200,000 and a maximum of £500,000, so it is restrictive; early repayment charges are 2% until 31/01/2013, meaning it does tie you into the rate for a prolonged period.
The product has a £999 arrangement fee; based on a loan of £200,000 at 60%, a valuation fee of £415, a lender Conveyancing fee of £126, a land registry fee of £280 and a completion fee of £35, while APR is 3.0%.
The big caveat to this product is that the option to switch to a Woolwich fixed rate without penalty during the early repayment charge period, which Woolwich call “drop lock”, does NOT apply to this product.
So while its headline rate may be very tempting if there are significant rises in interest rates, particularly in the second and subsequent years of the mortgage, it could become very costly indeed, particularly as early repayment charges on a minimum loan of 200K would amount to four thousand pounds as well!
For this reason, I would recommend seeking mortgage advice about the suitability of this product if it has your interest, and as usual, read the Key Facts Illustration prior to making any decision on a mortgage product.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. There may be a fee for mortgage advice. The amount will depend upon your circumstances but it is typically £200 or up to a maximum of 1.5% of the loan value.
Some buy-to-let and commercial loans are not regulated by the Financial Services Authority.
Big shifts are happening in the mortgage market at the moment, which are affecting all mortgage advisors quite a bit.
One of the biggest trends is the growing movement towards self-execution facilitated by comparison websites.
Now I am a fan of the internet; I even support comparison websites as they have a valid role to play. But Financial Advice and Mortgage Advice are not defunct because of them, and I want to give you some points to consider in my posts this week.
I had a recent scenario of someone looking to buy a second property as an investment and repay a mortgage over a short term; of perhaps ten years.
The client was self-employed and wanted a product without any tie-ins.
Now in this scenario, he would have very high monthly payments, and it would hamper his affordability and potential maximum loan.
The best rate product for his requirements also had an offset facility, so I suggested he could increase the term, reducing the payments he had to make, therefore making the loan look more affordable.
However, as it was an offset product, he could pay as much as he liked extra, and this would then reduce the mortgage term in line with his requirements.
This meant that he would not have to make the high payments; but could do so if he wished. For a businessman in the credit crunch, that was a compelling option.
It’s a great illustration of how mortgage advice plays a very different role to a comparison site.
In this case, it wasn’t about getting a lower cost; but using the features of a product to improve his chances of getting the loan and reduce the financial risk to him and his business; without increasing the cost.
That is why a Mortgage Broker is well worth speaking to, regardless of how much experience you have with mortgages.
