Is It Better to Pay More on a Mortgage or to Save?
At first glance, it might seem strange for anyone to choose to make higher repayments on their mortgage than required, but a moment’s thought shows the possible advantages. However, it’s not always the best use of your money.
Why Should You Overpay on Your Mortgage?
If you pay off your mortgage sooner than necessary, you’re saving on the interest you would have been charged over a longer period. This is essentially equivalent to be paid interest if you’d put that extra money into savings, instead — with one crucial difference.
At the moment, interest rates on savings accounts are close to a record low. Mortgage rates, in fact, aren’t very high either, but they’re considerably more than savings interest. This is actually always true. Whether we have a base rate of 0.75% or 15%, you’ll always get less from your savings than you’ll have to pay for your mortgage.
For instance, if you have a spare £10,000, investing it in a savings account that offers 0.5% interest will earn you a mere £50. If, on the other hand, you pay it into a mortgage with a 5% rate, you’ll be saving £500. It’s a no-brainer — or is it?
What Problems Might You Have from Overpaying on Your Mortgage?
Depending on what type of mortgage you have, there may be penalties on early repayment. This is most likely to apply to fixed-rate mortgages, which typically have a ceiling of 10% of the sum owed. If you overpay more than this, you may be charged anything from 1% to 5% of what you’ve paid, which could largely negate the benefits.
In general, this doesn’t apply if you have a Standard Variable Rate (SVR) mortgage, and you can overpay as much as you like without penalties. However, since the rates for SVRs tend to be considerably higher than fixed rate mortgages, you’re likely to be worse off in the long run.
It’s important to check the terms of your mortgage, though. The 10% rule isn’t universal for fixed rate mortgages, and some lenders might start penalising at a lower rate.
What’s the Best Strategy?
Before considering overpaying on your mortgage, it’s worth considering repaying any loans outstanding with a higher interest rate or a maxed-out credit card. Otherwise, read through the terms of your mortgage carefully to find out how much you can overpay without penalties.
Alternatively, you may be able to switch your mortgage and ensure you get the best possible terms. Why not check out how we can help you with that? Click here to learn more and how it works.
What Happens When My Fixed Term Mortgage Ends?
When you originally arranged your mortgage, you may have taken out a fixed-rate mortgage for a limited term. This is most typically between two and five years, but can be as long as ten.
Eventually, though, this arrangement will end. So what happens then?
What Is a Fixed-Rate Mortgage?
If you have a fixed-rate mortgage, the rate you pay will remain unchanged for the specified period, regardless of fluctuations in interest rates. This means that you can budget confidently for that entire period, knowing you’ll always be making the same monthly repayment.
This is usually an advantage, but there are exceptions. For example, if you’d taken out a fixed-rate mortgage in November 2007, when the Bank of England base rate was 5.75%, you’d have been stuck on this level after it plunged to just 0.5%. This is rare, however, and certainly the likelihood at the moment is that rates will be rising.
What Happens When Your Arrangement Ends?
That depends on what you do. If you take no action, then your mortgage will change to a variable type, most likely a standard variable rate (SVR) mortgage. This will mean that the lender will be able to change the rate as they like, although in general SVRs tend to follow the base rate.
SVRs are also likely to be more expensive. A typical current rate would be around 4-5%, whereas a fixed-rate mortgage, depending on the term and the lender, could be 1.5% or even lower. A better option is usually to negotiate a new fixed-rate mortgage.
What Action Should You Take?
Although a fixed-rate mortgage is usually a better option than an SVR, there are exceptions, and if this applies to you it may be better to accept converting to an SVR. This could apply, for instance, if there’s not much left to repay, or if you’re intending to repay the mortgage early, since SVRs typically don’t have the early-payment penalties normal for fixed-rate mortgages.
However, most people would be well advised to approach their current lender before the fixed term ends and find out what rates they are offering for a new fixed-rate mortgage. Bear in mind, though, that this may well not be the best rate on offer.
It’s generally best to get a wide range of options before you decide on which to go with. This isn’t easy to do, though, if you’re using the traditional method of approaching each lender and then comparing offers. Much better is to use a website that will process your numbers and come out with simple recommendations for the best options. Why not try that out here on our site?
What’s Involved in Switching Your Mortgage?
There are many reasons why you might wish to switch your mortgages. The most common are to get a better interest rate after your initial fixed rate period has finished or to cash in some of the equity you’ve built up. Whatever your reason is, however, the process involves much the same steps and questions.
Find Out if It’s Worth Switching
Switching your mortgage can be an invaluable step to take, but it doesn’t suit every circumstance. It’s important, therefore, to calculate the cost of switching and how much you’ll save by doing so.
However, the costs charged to switch mortgages vary considerably between lenders, and some may offer cost-free mortgages. This is just one reason why it’s vital to get a wide range of offers, rather than just approaching one lender.
Switching the Hard Way
If you’re relying on your own calculations to switch your mortgage, you’ll need to work out your loan-to-value. This can be done by dividing the sum outstanding on your current mortgage by the current value of your property and multiplying the result by 100 to get the loan-to-value percentage.
This will give you some idea of the range of options available to you — essentially, the lower the percentage is, the more options you might have. However, you’ll need to ensure that the valuation your lender makes is realistic, since they may base it simply on viewing the property from the street. If you feel they’ve undervalued it, you’re entitled to challenge their figure.
Having established this, you’ll then need to approach a number of lenders to find out what’s on offer. Mortgage deals vary immensely, and there’s no guarantee that any one lender will offer the mortgage that’s ideal for your situation. This is going to require a considerable number of appointments, and you’ll then have to look at the figures you’ve been given to decide which would be the best to go for — which isn’t always simply the lowest repayment figure.
Switching the Easy Way
On the other hand, it’s far easier if you find a good comparison site, which will provide a wide range of options. This saves you from approaching each lender individually for quotes.
However, that doesn’t help much if you still have to navigate your way through working out the figures you need to base your decisions on. Some comparison sites will simply tell you what deals are out there, but what you need is one that will convert all your data into the best recommendations.
Why not give it a try on our site and see what you think? Contact Us Today
