News in the market currently paints a dim picture for mortgage rates as we’ve seen the Bank of England’s base rates hit 5%.
Are you seeing an increase because you’re on a variable or tracker rate, or your fixed rate is due to come to an end and you’re expecting a hefty increase?
There are steps you can take to help offset the increase, cope with rising costs and make mortgage payments more manageable.
In this article, we’ll look at 6 effective strategies to help you reduce your mortgage costs and save money over the long term.
1. Consider overpaying your on your mortgage:
If you’ve still got some time left on your fixed-rate deal, you could make your mortgage work harder for you by overpaying.
Even a small additional payment can make a considerable difference in the long run. By reducing the principal balance, you decrease the amount of interest accrued over time, effectively shortening the term of your mortgage.
Before making overpayments though, review your mortgage terms and conditions.
Some lenders impose penalties or restrictions on overpayments, such as limiting the amount or frequency of overpayments.
However, many mortgages allow for overpayments of up to a certain percentage of the outstanding balance without penalties. This usually falls at about 10% per annum.
Determine the maximum amount you can overpay without incurring extra charges, and if possible, set up a standing order to automate these additional payments.
Overpaying your mortgage is particularly beneficial in the early years when the majority of your payments go towards interest rather than the principal balance.
Whilst it won’t lower your payments in the short term, in the long term you can significantly reduce and offset the interest paid.
As an example, if you made overpayments of £50 a month on a £200,000 mortgage with a 25-year term and interest of 5.5%, you could save a total of £15,450 over the total mortgage term.
2. Save for a larger deposit:
Saving for a larger deposit can help you secure a better mortgage rate.
Lenders often offer more favourable rates to borrowers who can put down a substantial amount upfront.
By increasing your deposit, you decrease the loan-to-value (LTV) ratio, which reduces the lender’s risk and may lead to a lower interest rate.
Cut back on unnecessary expenses and direct a portion of your monthly income towards a savings account dedicated to your deposit.
As an example, if you’re planning to buy a home for £250,000 with a £50,000 deposit, your monthly repayments would be £1,111 on a mortgage rate of 4.5% and a 25-year repayment period. You would need to save an additional £5,000 to offset the impact of every 0.25% increase in interest rates on your monthly mortgage repayments.
Additionally, you could explore government schemes such as the Help to Buy ISA or Lifetime ISA, which provide bonuses on savings for first-time buyers.
3. Extend your mortgage term
The usual mortgage term is around 25 years. But there are options out there to extend a mortgage over 30-40 years. Another strategy to lower your mortgage payments is by extending the term of your mortgage.
By spreading your payments over a longer period, you can reduce your monthly repayment amount.
However, keep in mind that extending the term will result in paying more interest over the life of the loan. This approach is suitable for homeowners who prioritise immediate cash flow over long-term interest savings.
For example, repayments on a £200,000 mortgage with a rate of 5.5% would be £1,228 a month with a standard 25-year mortgage term.
But if you increase your mortgage term to 30 years, your monthly repayments would drop to £1,135.
If you increased it to 35 years, your monthly repayments would drop to £1,074.
Or, to put it another way, increasing your mortgage term by five years would offset a 1% increase in interest rates.
4. Switch to interest only:
Switching to an interest-only mortgage can provide temporary relief for homeowners facing financial difficulties.
Although a traditional mortgage would be a repayment mortgage, where you pay the interest and loan amount off at the same time. With an interest-only mortgage, you only pay the interest charges each month and not the principal amount.
This lowers your monthly payments but does not contribute to reducing the overall debt.
It’s important to note that this approach requires a solid plan to repay the principal balance in the future, such as through investments or the sale of the property.
5. Make money out of your property:
Another way to offset your mortgage costs is by making money out of your property.
Consider renting out a room or parking space to generate additional income.
Platforms like Airbnb provide an opportunity to rent out your property on a short-term basis, allowing you to cover some or all of your mortgage payments.
However, it’s not for everyone and you’ll need to brush up on local regulations and consider the responsibilities and potential risks.
6. Review and switch your bills
Not directly impacting your mortgage rates but is a further way to offset any increase on your mortgage.
Using something like Utilities Warehouse can help you consolidate and save money on your household bills. Whether it’s energy, broadband, mobile and insurance you could potentially save around £400 a year.
But can I lower my interest rates and lower my mortgage payments?
You’ll need to shop around the market to find the best mortgage rate for you. Finding the right deal based on your personal circumstances is important.
Brokers like us at the Online Mortgage Guru have access to whole of market lenders. This means we can do the leg work for you to find the best deals based on your circumstances.
With rising interest rates leaving you with less in your pocket, finding ways to save money on your mortgage rates and offset any changes requires careful consideration and proactive financial planning.
By overpaying your mortgage, extending the term, saving a bigger deposit, switching to interest-only, or making money out of your property, you can effectively reduce your mortgage costs in the UK.
Even small savings can add up over time, allowing you to achieve greater financial freedom and security.
By implementing strategies like these and making informed decisions, you can save money and potentially pay off your mortgage sooner, opening up opportunities for a brighter financial future.
Need help securing a good rate on your mortgage or need an idea of what your options are? Contact us at the Online Mortgage Guru on 0345 3669799 or email us via firstname.lastname@example.org.