Whilst a mortgage is usually set for a fixed period, it doesn’t mean that you cannot look at ways of reducing that term and owning your property earlier. If you want to do this, depending upon how you achieve it, you could reduce your overall mortgage term by several years, and end up being able to move on or experience financial security earlier in life. There are several well proven ways of doing this, all of which have their pros and cons.
Switch deals. It makes perfect financial sense to switch to a cheaper deal, pay less interest on your mortgage, and effectively increase the amount you pay on the outstanding loan money every month, thereby effectively shortening your loan period.
According to many comparison sites, the current average standard variable rate (SRV) is 4.71%, making monthly repayments on a mortgage of £150,000 around £851. But if you were to switch to a cheaper deal and lock into a five-year fixed deal at 1.79%, then the monthly repayment would drop to around £620, meaning that, potentially, you could put that remaining £231 back into the mortgage. Over the five years of the deal, you could theoretically put an extra £13,860 into the pot, and that is a substantial amount off your mortgage.
Overpay regularly. Even though you have a repayment amount set out each month – depending upon interest rates – and you must always make those payments, there is usually no penalty for overpaying up to a certain amount off the mortgage (typically up to 10% of your balance per year), and many people find that this is an effective way of reducing their mortgage term. If you have a £150,000 mortgage which is due to run over a 25-year period, and has an interest rate of 3%, overpaying by just £50 a month, you could save up to £6,548 in interest and your mortgage would be paid off 2 years and 3 months early. This is an excellent option if you also regularly receive large windfalls, such as a yearly bonus, which you could use to reduce your balance.
Shorten the repayment term. Plainly, if you shorten the length of your mortgage, the less you actually end up paying in interest rates, though this is offset against the increased payments that you would need to make monthly.
Looking at a £150,000 mortgage taken out over 25 years at a fixed rate of 3% would have a monthly repayment of around £711. However, by changing the terms to just fifteen years at the same rate, the monthly repayments rise to around £1,035, but the interest paid would be considerably less. This is an excellent option if you are comfortable with larger monthly repayments.
Get an offset mortgage. This is a type of mortgage where any savings that you may have are offset against the original debt, with the interest charged on the remaining amount of mortgage. For example, supposing that you had £10,000 in savings, and use it to offset against a £150,000 25-year mortgage at 3% would save £10,426 in interest and see the mortgage repaid thirteen months. Early. If you had £20,000 savings, offset against the same mortgage would save £19,486 in interest and see the mortgage repaid twenty-six months early, and so on. You still have access to your mortgage and can continually top up the pot of savings if you want.
If you are interested in shortening your mortgage term, talk to Grange Mortgages to get independent advice, and to look at your options.