How to cut the biggest bill of them all … your mortgage | Mortgages

Soaring energy, food and petrol prices amid recession warnings mean most households will be thinking about how to keep other costs as low as possible. So what should homeowners do with their biggest monthly expense – the mortgage?

Here are some of the ways you can trim it back.

Mortgage Payment Vacation

In March 2020, all banks were told by the government that they would have to offer a break of up to six months to all customers requesting loan, credit card and mortgage repayments of up to six months to ease some of the financial pressure that people have been exposed to during the lockdown.

While that program ended last year, you can still contact your mortgage lender and ask for a payment holiday if you’re worried about paying those monthly bills. Whether it is granted or not is now at the discretion of the lender. If they offer you a break, it usually lasts around six to 12 months.

“If you’re ever struggling with repayments, always contact your lender as soon as possible,” says Brian Murphy, director of lending at the Mortgage Advice Bureau.

“You need to be lenient and do whatever it takes to help you through a difficult financial time. ”

However, there are major downsides to taking a pay holiday, so treat it as a last resort.

Even if a bank approves your request for a short break, brokers warn that your credit file will show that you have failed to make your monthly repayments. This could affect your ability to refinance or take out other types of loans for years to come.

Banks will also only offer a pause on repayments and not write them off, meaning your monthly bill after the holiday will be higher than it was before to make up for repayments and interest that the bank missed.

extend duration

A better option for keeping your credit file healthy is to extend your mortgage term, which lowers monthly payments by spreading your debt over a longer period of time.

Consider a property that cost £450,000 with a £200,000 mortgage and 15 years remaining. At 2% interest on a five-year fixed-rate loan, you could reduce your monthly repayment by £130 (from £1,287 to £1,157) by adding two years, or £275 (from £1,287 to £1,012). by adding five years, according to mortgage broker John Charcol.

The catch is that you pay more interest in the long run. Nicholas Mendes, technical director for mortgages at John Charcol, says that can add up to thousands of pounds just by adding two or three years of extra interest.

The average tenor for first-time buyers is at least 30 years, he says, as mortgage and home prices have risen and deposits have been stretched even further.

Younger borrowers have more time to increase their earning potential and switch to another business in the future. Banks may be reluctant to extend your term if you are in later life, and may wonder if it will make you worse off when you retire.

Also consider that you are introducing more volatility. The longer you have to pay off your mortgage, the more exposed you are to rising interest rates.

Next month, the Bank of England is expected to raise the benchmark rate, to which mortgage rates are linked, by a further 0.5 percentage point to 2.25% from the current 1.75%.

Go only on interest

Another popular option during the pandemic has been to switch the loan type from a mortgage, where you pay back both the principal and interest on your home, to an interest-only deal, where you only pay the accrued interest.

This will drastically reduce your monthly repayments.

Given the same £450,000 property with an outstanding £200,000 mortgage and an interest rate of 2%, you would reduce your monthly bill by £953 a month (from £1,287 to £334) by stopping principal repayments.

Again, most lenders will take this into account, but they will take into account how much you make. Some have strict income limits – between £50,000 and £100,000 – says Mendes. “If it’s a joint income, the minimum limit is higher.”

You also need to have a plan of what you will do when the pure income period comes to an end. Most interest-free borrowers expect to sell and downsize their home to pay off the remaining principal.

If this isn’t for you, you can choose to overpay later and gradually make up the difference, or switch to an interest-free loan for a short period of time and then pay it off in one lump sum before the loan term ends.

Again, discuss with your lender what is possible.

Consider overpaying

With the cost of living getting so high, it might seem counterintuitive to think about throwing even more money on your mortgage than you already have.

But if you have a healthy amount of emergency cash savings and are lucky enough to still have a fixed rate loan before the base rate started to rise, and with a very competitive interest rate, you can save a lot of money in the long run by spending too much now pay.

“While reducing the balance directly lowers the interest you pay, it also helps build equity in the property, which could mean more and cheaper options are available when you come to refinance,” says Peter Gettins, product manager at L&C Mortgages. “Continuous overpayment can ultimately result in the mortgage being paid off years early.”

He says pretty much all mortgages allow for some level of overpayment — typically around 10% if you’re on a fixed-rate contract — but read the terms and conditions so you don’t inadvertently incur charges.

“As always, it’s important to pay off the most expensive debt first, so any credit card balances that are accruing interest or higher-priced unsecured loans should be given priority,” Gettins warns.