A Popular Mortgage Myth
A Popular Mortgage Myth
Shopping around for mortgages is so popular these days that
many people can be excused for thinking that switching
lenders is the only way to save money on your home loan.
But there is a much easier way that does not require phone
calls, computers connected to the internet, or trips to
your bank or building society.
Did you know, for instance, that making overpayments on
your mortgage can slash thousands of pounds off your
interest bill? Additionally, it will cut the length of time
taken to repay your home loan so you get to own your home
sooner.
Imagine, say, that you have a £100,000 repayment mortgage,
with a 25-year term and an interest rate of 6%. Your
monthly payments will be £644, and after 25 years you will
have paid back a total of £193,290. In other words you will
have paid back £1.93 for every pound borrowed.
If, however, you were to overpay your mortgage by just £50
each month, your total payment would be reduced to £177,279
-- a saving of over sixteen grand in interest. Furthermore,
this overpayment shortens the length of the mortgage by 45
months, which means almost four extra years of bliss.
Before you rush out to change your standing order or dump a
lump sum into your mortgage, check to make sure that your
lender won't punish you for doing so. In the main, most
flexible mortgage lenders will allow you to make
overpayments of up to 10% each year. But if your lender
doesn't allow this, you have another trick up your sleeve!
Lessening the term of your mortgage from 25 years to 21
years would increase your payments in exactly the same way
as overpaying by £50 each month. Mind you, this is a much
harsher way to do it because payments are fixed. However,
it doesn't prevent you from increasing your term again,
should you need to, by simply writing to your provider.
On the whole, paying off your mortgage early is reckoned to
offer one of the best risk-free rates of return around.
Overpaying a loan charging, say, 6% a year is equivalent to
earning a tax-free savings rate of 7.5% for a basic-rate
taxpayer. For a higher-rate taxpayer, this risk-free and
tax-free rate is equivalent to 10%, which is practically
unbeatable!
Many people forget that even though we sign up for a
25-year mortgage term there is no earthly reason why we
have to stick to this. If you have any extra cash each
month, using it against your mortgage can make a huge
difference and it can save you thousands of pounds in
interest each year.
Good luck on removing that mortgage millstone from around
your neck!
About the Author:
Fool.co.uk's Mortgage Comparison Centre demystifies
mortgages with impartial information on mortgage products.
Compare mortgages online at
www.fool.co.uk/mortgages/compare-mortgages.aspx and
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