Do you know how much you pay towards your mortgage each year? What proportion of your annual income is eaten up by housing costs?
Halifax has declared 13th April UK Mortgage Freedom Day, as it takes us until the 103rd day of the year to earn enough to cover our annual mortgage expenses.
If you don’t like the idea of over three months’ of wages going towards your mortgage every single year, there are some things you can do to help you pay it off early.
It’s a sensible decision to pay off big debts as early as possible, particularly at the moment as interest rates are still at an all-time low. The combination of stagnant wages and relatively low inflation also means that you can’t rely on your debt reducing by itself.
Although huge sums of debt can seem overwhelming, the smallest changes can make significant differences to your balance. Paying a bit more each month could help you pay off your mortgage years earlier than originally planned and save thousands of pounds in the process. Here are some top tips for helping you pay off your mortgage sooner.
Look at other debts
If you’ve got other debts elsewhere, particularly catalogue or store card debts, it’s important to clear these first. While you’re likely to owe more on your mortgage, this type of credit usually has much higher rates of APR.
You don’t have to actually pay off the balance immediately, and provided you’ve got a good to excellent credit score, you should be able to transfer the debt to a 0% credit card. As well as giving you the opportunity to start reducing your mortgage, it can also help you save plenty on interest charges.
Unless you’ve just come into a windfall or been offered a promotion (congratulations), the chances are you don’t have any additional spare cash to put towards your mortgage. With that in mind, you’ll need to find a way to squeeze some additional money out of your income.
Firstly, draw up a budget to help track expenses. Be honest with yourself and look at where you might be able to cut down. We often spend small amounts regularly, for example, that £2.50 latte you have at work, adds up to over £600 a year.
If you’ve got everything you can out of your budget, it’s time to figure out where you can boost your income. Think about comparing and switching your energy or broadband provider, take on additional work from home or sell some of your stuff. If you have substantial savings, make sure you’re getting the best interest rate and have used your annual tax-free allowance.
Now you know how much extra you could have at your disposal each month, you can plan to make overpayments on your mortgage, either in a lump sum or monthly. Most providers will allow you to pay back an additional 10% without incurring a penalty, but be sure to double check – you want to save money not spend more!
If you have a £100,000 mortgage over 25 years with a fixed interest rate of 6%, your monthly payments would be £645. Just paying an extra £50 per month (from that latte fund, for example) could save you over £16,000 and clear your debt three years early. The more you overpay, the more you will save in the long run. Overpaying by £150 a month, would save in excess of £35,000.
The standard mortgage runs for 25 years, but there is an option to shorten the term. Whilst this has a similar impact to overpayments, if you officially reduce the term of the mortgage, your minimum payments will be much higher. This might give you the motivation you need to clear your mortgage, but it could also put you in financial difficulty if you haven’t thought it through properly.
However, the benefits are obvious. Let’s take the same mortgage as above, £100,000 with 6% interest for the entire term. Over 25 years the minimum payment is £645, but by shortening it to 20 years, the monthly repayments climbs to £716, saving you over £20,000 or £1,000 each year.
There are several different types of mortgage, repayment, interest-only, but also ‘offset’. This mortgage is linked to a savings account, with any money deposited into the savings account, being deducted from the balance of the mortgage.
With traditional savings accounts, you’ll earn interest, but an offset mortgage pays off your debt instead. For example, if you had a £100,000 mortgage, but had saved £15,000, you’d only pay interest on the difference – £85,000.
Maintaining a high savings balance allows you to benefit from lower repayments, but by sticking to the original figure, you’ll be making overpayments – reducing the term of your mortgage. It’s a win-win situation for most people.