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.
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 normally set an offset facility to work in two ways. It can act as an over payment reducing your mortgage term or you can opt to make it reduce your monthly payment instead.
The main benefit of using an offset account against over paying your mortgage is the fact 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 but only pay for it when you take the money out of the offset account although again you need to consider how borrowing extra money will effect interest rates, loan to value and arrangement fees too.
Offset isn’t really a type of product so you can still get all the normal 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 have to pay in order to get this option will be justified by the benefits you receive and that is something we can consider for you in the advice process. You can get more information or to get expert advice on offset here
In Q & A we look at some of the questions mortgage advisers answer on a day to day basis.
Question; Whats an Offset Mortgage and how can they 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 held with the lender and any balance held in the savings account will be offset against the outstanding loan amount and no interest is paid on the equivalent balance of the loan. 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 on 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). This 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 that 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 either use the offset 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 and 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 have announced a new tracker at 1.48% above base rate for the first year then reverting to 2.49% above 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 maximum of £500,000 so it is quite restrictive, early repayment charges are 2% until the 31/01/2013 meaning it does tie you into the rate for some time as well.
The product has a £999 arrangement fee, and based on a loan of £200,000 at 60% a valuation fee of £415, lender Conveyancing fee of £126, land registry fee of £280 and completion fee of £35 while APR is 3.0%.
The biggest 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 thoroughly recommend speaking to a mortgage advisor or 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.
There’s some big shifts in the market at the moment which are affecting all mortgage advisors quite a bit, and one of the biggest trends is the growing movement towards self execution facilitated by comparison websites.
Now I am a fan of the internet and I even support the comparison websites as they do 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 scenario recently of someone looking to buy a second property as an investment and repay a mortgage over a very short term perhaps 10 years. The client was self employed and wanted a product without any tie in.
Now in this scenario he would have very high monthly payments, and it is a tricky market for affordability at the moment. The best rate product for his requirements also had an offset facility so I suggested he could increase the term of the mortgage reducing the payments he had to make and make the loan look more affordable. However as it was offset he could pay as much as he liked extra and this would then reduce the mortgage term back in line with his requirements.
This meant that he wouldn’t have to make the high payments but could do so if he wished, and for a businessman in the credit crunch that is a very useful option to have.
I think this is a prime example 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 a products features to improve his chances of getting the loan, and to reduce the financial risk to him and his business without increasing the cost. That’s why a Mortgage Broker is well worth speaking to regardless of how much experience you have of mortgages.