Tuesday, 11 November 2014

Save £30,000 On Your Mortgage

Shortening the term, or overpaying your mortgage effectively do the same thing - potentially, save you a lot of money! How much exactly? Taking a £200,000 repayment mortgage with a 25 year term at 4.5 percent interest as an example, you could stand to save almost £30,000 by lowering the term to 20 years. If you can afford the hike in the monthly repayment it is really a no-brainer.

The same can be achieved by simply over paying, if your lender allows you to do so. The benefit of over paying, rather than shortening your mortgage term is that you can stop if you need to without repercussions.

Another option is to overpay when it suits you. This can add up over time whilst giving you room for movement should you need it. Sadly, not all lenders are comfortable with such a flexible plan. Always check with your mortgage provider and check to make sure they aren't reducing your monthly payment to compensate. This may give you a greater disposable income at times, but it won't save you money.

This all gets a little more complicated when you factor in all the different terms and conditions and types of mortgage available, as well as things like inflation. Are you simply better off saving money in the long run? This depends. Is your mortgage rate higher than the after tax rate you can earn in your savings account? If the answer is yes then overpaying is the better option.

If you are wise with your investments then it may pay to save and invest and stick to your current mortgage plan. Some people aren't comfortable with investing, or simply don't wish to risk their money. Only you can decide whether investment is the right path for you.

Timing overpayments

Mortgage providers calculate interest owed in four ways; daily, monthly, quarterly or yearly. Almost all new mortgages use daily interest. If yours doesn't you need to spend some time working out the best times to overpay. As an example, if your mortgage interest is calculated quarterly, and you repay just after the start of a new quarter then that over payment will have no real impact for the whole quarter. In this case it is dead money and you would be better off putting it in a savings account and repaying at a more beneficial time.

Ask your insurer exactly how they calculate interest if you are unsure, and ensure you are paying at times that bring you most benefit.

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