Money News Feature

Reducing your monthly mortgage repayments

Wednesday 5 October, 2011

By Dominic Welling - dominic.welling@consumerchoices.co.uk

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If you’re always struggling to make your mortgage it’s easy to feel like you’re trapped. But there are ways of cutting your monthly mortgage payment which could provide a solution.

A mortgage is, perhaps, the biggest financial commitment of your life, and the monthly repayments you sign up for are daunting, but there are ways to make this financial burden less frightening and hopefully save some cash in the process.

The best way to reduce your monthly mortgage payment is to remortgage

Although these options will not be available to everybody, it is worth knowing about them, especially if you’re concerned about meeting your mortgage payments in the future, or if you have already started to struggle.

1. Remortgage

The best way to reduce your monthly mortgage payment is to remortgage onto a cheaper deal, either with your current lender or a new one. But before you switch lenders and potentially end up paying a raft of fees, talk with your current lender to see what deals it might offer you to keep your business.

Depending on your individual circumstances, your lender may be able to offer you a deal with a lower interest rate than you are currently paying. This in turn means you will lower your monthly repayments, whether you are on an interest-only or a repayment deal.

Be warned, however; when you remortgage, if you opt for a tracker mortgage over a fixed-rate mortgage when you remortgage this could mean your payments could increase over time depending on what happens to the Bank of England base rate.

Some other things to be aware of when you remortgage include exit fees and early repayment charges.

Most fixed-term mortgage deals will apply a penalty - usually referred to as an early repayment charge or exit fee - if you clear the balance of your mortgage before the agreed term. Any redemption penalties will be set out in your mortgage terms and conditions and are likely to be either a certain percentage of your outstanding mortgage balance, a number of months’ interest or a fixed fee regardless of the size of the outstanding loan.

Interest-only or repayment mortgage

Switching onto an interest-only deal will cost you less each month than a repayment mortgage, because as the name suggests, you will only being paying the interest on the loan each month.

With a repayment mortgage, each monthly payment covers that month’s interest on the loan and also a sliver from the sum you originally borrowed. As the mortgage term progresses and the capital sum decreases (all those slivers add up to a chunk), you gradually pay less interest and more capital so at the end of the mortgage term the loan is paid off.

However, the longer you stay on an interest-only mortgage, the more interest you will pay in the long run. Also, as you’re not paying off any of the capital you originally borrowed to purchase your property, at the end of the mortgage term, you still have to pay this off.

Be aware, however, that you will only be allowed to take out an interest-only mortgage if you can prove to the lender that you have some sort of repayment vehicle in place such as an individual savings account (ISA) or an endowment policy from a life company that will mature and pay off the loan at the end of the mortgage term

If this is the case, you may not save much cash by switching, as paying an interest-only loan and also paying monthly contributions into an ISA for example would, over the same term, cost roughly the same as a repayment mortgage.

With a repayment mortgage you will tend to pay both the interest and a chunk of the loan each month, so it inevitably costs more on a monthly basis. Over the duration of the loan however, you will end up paying less interest so it will work out cheaper.

2. Pay off lump sums

Some lenders allow random repayments of capital, sometimes limited to a proportion of the loan outstanding per year, which will help reduce the size of your loan and therefore the repayments.

For example some lenders might allow you to pay off 10% of the mortgage each year. If you have some extra cash hanging around in savings or a pension, then you can use this to reduce your mortgage size and therefore your repayments.

At the moment rates on savings accounts are low, so if you have cash earning little interest in one of these accounts you might as well take it out and use it to pay off a chunk of your mortgage. This could be a better use of your money in the long run and reduce your monthly repayments. Check that the lender calculates your interest on a daily basis as this means any lump sum payment will immediately reduce your interest payments.

At the moment, rates on savings accounts are low, so if you have cash earning a pitiful rate of interest in one of these accounts you might as well take it out and use it to pay off a chunk of your mortgage. Interest paid on money borrowed is always much higher than interest earned on money saved so, by reducing your mortgage debt and the interest you pay on it, your money works harder for you than if you’d simply left it on deposit. However, you should always consult an independent financial adviser before making a move like this. Also, make sure you still have enough available cash in reserve to deal with an unforeseen event such as illness or redundancy.

3. Payment holiday/underpay on mortgage

Your lender may agree to let you take a payment holiday, which would basically give you a break from making repayments for a set period of time - normally around three months. But it is likely that you’ll need to have made additional payments in the past to qualify for a holiday.

This could be a good short-term solution, but bear in mind that the repayments that you don’t make will be added on to your existing mortgage.

This means the amount of interest you will pay overall will increase and it could take longer to pay off your mortgage.

In addition, your lender may let you make reduced payments for a set period of time, increasing short-term affordability, however this too would lead to you paying more interest on your mortgage overall.

4. Extend the length of your mortgage

If all else fails you may be able to extend the term of your mortgage, ie increase the period of time over which you will pay back your mortgage.

This will reduce your monthly repayments but it means you will be paying off your mortgage for longer and over that time you will pay more interest