How can I reduce my mortgage payments?
Due to the recent financial turbulence, a lot of us are feeling the pinch with the cost of living rising and now with the a spike in mortgage interest rates.
In this article I’ll explain four methods you might be able to consider, if you’re looking for a way to reduce your monthly mortgage payments.
Don’t let your mortgage fall on to an SVR
Once you’ve reached the end of an introductory fixed, discounted or tracker period, your mortgage will most likely fall on to the lender’s SVR (Standard Variable Rate). This is a flexible rate, allowing overpayments or full repayment without penalty, but it’s usually significantly more costly than introductory fixed, tracker or discounted products.
If your mortgage was arranged by a broker, they will usually get in touch with you before your introductory scheme ends, but if you’re already on an SVR, or your product ends within the next 6 months, you should take advice ASAP to avoid paying more than you need to.
Extend the term of your mortgage
A good mortgage adviser will recommend you repay your mortgage over the shortest term you can comfortably afford. This will mean you pay as little interest as possible and are mortgage free as soon as possible. Whilst lenders are ultimately responsible for assessing affordability, they often do this using ONS data, rather than a personal assessment. Your mortgage adviser should help you understand your budget, income and expenditure, prior to applying for a mortgage, to ensure the monthly payments are affordable on the desired term.
However, with interest rates increasing, what was affordable a few months ago might look very different now. One way to reduce your monthly payments could be to extend the term of your mortgage. Most lenders will allow you to take a term up to 35 years, sometimes as much as 40 years, depending on your age and stated retirement plans.
You could view this as a short term solution. For example when you come to remortgage in the future, you could reduce the term back to what it was previously.
Extending the term can be considered when looking to remortgage, or your lender may allow you to extend the term during the product period.
Switch to Interest Only or Part & Part
Switching some or all of your mortgage to interest only means that at the end of the mortgage term you would owe a lump sum to the lender. The lender would expect you to have a plan to repay the remaining debts, potentially by cashing in an investment, refinancing to another lender, or selling the property and downsizing. If you don’t have a suitable repayment strategy in place, the lender could ultimately repossess the property and you could lose your home.
Compare this to a repayment mortgage, which is guaranteed to be repaid at the end of the term, so long as all the monthly payments are met along the way.
Quite simply with an interest only mortgage, you only service the interest and your monthly payments don’t reduce the capital owing. Therefore at the end of the mortgage term you will still owe the original balance from the beginning of the mortgage.
Where a mortgage is referred to as ‘Part & Part’, this means a certain amount of the mortgage is on interest only and the other part on repayment. For example, you could have a £100,000 mortgage, where £40,000 is on repayment whilst the other £60,000 is on interest only. This would mean your monthly payments could be lower than if they were on full repayment, but at the end of the term, you would still owe £60,000.
Not everyone will be eligible for an interest only mortgage, as some lenders have a minimum income requirement or minimum amount of equity.
Use a reserve fund if you’ve overpaid in the past
If you’ve overpaid on your mortgage in the past and have built up a credit balance or ‘overpayment reserve’ some lenders will allow you to tap into this credit to reduce your payments for a period, or even pay nothing at all until the credit is used up. Not all lenders allow this, so if you’re in credit you should ask your lender first – never assume you can just stop making the regular payments or you might find the lender registers arrears against you.
Access a lower LTV product
Lenders price their products in Loan-to-value (LTV) tiers. If you are on the cusp of a loan to value tier it may be advantageous to put down a slightly larger deposit or pay a lump sum off your mortgage, if you have the available funds to do so.
For example, if your borrowing requirement was 86% LTV (Borrowing £86,000 against a property worth £100,000) you may get a slightly better interest rate if you paid £1,000 to reduce the LTV down to 85%. This would then have a downward impact on your monthly payments.
The same result can sometimes be achieved by challenging the valuation a lender has for your property when remortgaging. Using the same example above, if the lender has your property value down as £100k but you believe it’s worth more, some lenders will let you challenge the valuation. If they agree and increase their valuation to say £105,000, then a better value product may be available.
All of the options above can be explored with you by a good independent mortgage adviser, who will know how each lender works and can explain to you the benefits and risks of each option.
Will Sproule – 27th October 2022