Lowering the cost of your mortgage isn’t just a case of finding a lower interest rate. Over a typical 25 year term, a £100,000 mortgage costs over £177,000 to repay (assumes interest rate of 5%). To celebrate UK Financial Planning Week, Danny Cox CFP, Head of Financial Planning at Hargreaves Lansdown looks at ways to cut the total cost of buying your home. You’ll find useful tips and tools on www.FinancialPlanningWeek.org.uk/wayfinder
Shorten the term, less means save more
Set your mortgage to a 20 year term not the typical 25 years and you will save around £17,000 over the lifetime of a £100,000 mortgage. Those who opt for a 30 year mortgage at outset compared to a 20 year mortgage save £127 a month but pay over a staggering £37,000 more for their home.
The typical mortgage term is 25 years: if you can afford to, opt for a shorter term, perhaps 20 years.
As an alternative to setting a shorter mortgage term, most mortgages allow you to make overpayments during the year. Even if you can only afford to overpay small amounts, every time you make an overpayment you reduce the amount of interest you will pay over the lifetime of the mortgage and the mortgage term.
For example, overpay a £250,000 mortgage by £100 a month, and you will repay your loan 2 years and 11 months early, saving £25,383 (assumes 5% interest).
Interest only mortgage? Have a repayment plan in place
Interest only mortgages are much cheaper on a month by month basis. For example a £150,000 interest only mortgage is £562 per month compared to £843 for a repayment mortgage (assumes 4.5% interest). However after the 25 years term and £168,750 in interest payments, you still owe £150,000 unless you have plans in place to repay the capital. The best way to guarantee that your mortgage is paid off at maturity is to switch to a repayment mortgage.
Only borrow what you need to borrow
When buying a house it’s very easy to add various fees and costs to the loan, or borrow a little more for decorating, new furniture or home improvements. Although in the short term the monthly repayments may be inexpensive, every £1,000 you borrow costs £1,775 to repay over 25 year term and is therefore very expensive (assumes 5% interest). Therefore only borrow what you need to borrow to keep the costs over the lifetime of the loan down.
Expect the expected – prepare for the worse
Mortgage interest rates remain at amongst their lowest in history. However at some point they will rise and, unless you are on a fixed rate, your monthly mortgage repayments will also rise. For example, a £125,000 repayment mortgage costs £591 per month at an interest rate of 5% but increases to £715 per month if interest rates hit 7%.
Look ahead to when interest rates might rise and either fix your rate now or look at ways in which you can pay down the mortgage borrowing to keep repayments from rising.
Article written by Danny Cox, Head of Financial Planning at Hargreaves Lansdown
Copse Magazine are not financial advisers. This article is intended to make you think and start a conversation – when it comes to actually spending your money (or borrowing some)… talk to an independent financial adviser.