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You and your mortgage

Category: Mortgages
Author: Tim Leonard
Updated: 05/12/2017

What is your relationship with your mortgage? Does it sometimes just feel like a one-way street, where all you do is make your monthly payment and then forget about it? If so, it could be time to change the way you see it. By taking a greater interest in your mortgage you could save interest, and saving interest means being mortgage-free sooner. And that frees up the money you currently use for your biggest monthly outgoing to be used in other ways.

So don't keep madly plodding along – take control and get your mortgage paid off in the shortest and most efficient way possible!

Beware of interest-only mortgages (when you've no means to repay them)

Is your mortgage wholly or partly on interest only? How do you intend to pay off this part of your loan? You may have an endowment, or want to use your pension commencement lump sum, or you might even plan to sell your property and downsize. Whatever your plan, it's important you have one.

Many borrowers, at the height of the housing boom, took interest-only mortgages as they were cheaper than repayment – with only a vague notion on how they were going to repay this debt later. Don't sleepwalk to the end of your mortgage term without doing something about it – especially if you want to stay in your home and not have to move.

You've got a couple of options to get yourself on the road to repayment:

1 - Overpay

If you overpay, you will start eating into the money you owe, rather than just treading water paying interest. Increase your overpayments to the level you would have to pay on a full repayment mortgage and you get the best of both worlds – you'll repay your mortgage in full by the end of the term, but have the flexibility to "suspend" your overpayment if your finances become pressed.

2 - Change to full repayment

You could simply switch your mortgage to full repayment. This could substantially increase your monthly payments, so keep an eye on how much you can afford. You might consider lengthening the term of your mortgage to keep this within the means of your budget, but at least your home will be your own at the end of the mortgage term.

It may be possible to change the terms of your mortgage with your existing lender – speak to them to see whether you can. However, it might be the case that you have to remortgage in order to make these changes, so weigh up the costs of swapping over against the advantages of switching to full repayment earlier.

Overpay and keep overpaying

Even if you're on a repayment mortgage, if you can afford to pay a little extra every month, overpaying is a very good idea. Every penny that you pay over and above your monthly payment goes straight into repaying your loan. Less loan = less interest, and that means you'll finish repaying your mortgage earlier.

You can check whether you can make overpayments to your mortgage in Section 11 of your Key Facts Illustration or Mortgage Offer. Most mortgages will allow you to overpay up to 10% of the outstanding balance every year while you are on an introductory fixed rate, with unlimited overpayments allowed should you stay on the lender's standard variable rate thereafter.

But how does overpaying affect how long you'll be paying your mortgage? The following example is based on a £150,000 mortgage being charged an interest rate of 5.00%, over a term of 25 years.

How much earlier would you finish your mortgage if you overpaid…
£20 per month? £50 per month? £100 per month? £150 per month? £200 per month?
1 year 2 years, 6 months 4 years, 6 months 6 years, 2 months 7 years, 7 months
SOURCE: HSBC's Overpayments calculator. All figures are to be viewed as a guide only, and depending on the terms and conditions of your mortgage, it could take you longer to repay your balance.

A mortgage doesn't have to be for life

Why does everyone seem to set their mortgage term for 20 or 25+ years? There's no rule that says you have to set yourself a long mortgage term!

This said, the key thing you must take into consideration is your budget. Putting a massive strain on your finances is going to be counterproductive, but if you can afford to comfortably repay more every month, why wouldn't you?

Setting your mortgage term shorter is beneficial if you have the intention to overpay but never do. By setting your contractual monthly repayment higher, your increased mortgage payment will soon become part of the general monthly exodus from your current account known as "the bills". It also means that your money is going to be working more efficiently, reducing your mortgage quicker, and therefore freeing you of your biggest monthly financial commitment even sooner than you thought.

Remember that the cheapest monthly payment may feel a lot kinder to your wallet, but you should look at the longer term picture when it comes to your mortgage - and longer term, a cheap monthly payment means an expensively repaid mortgage.

If you're behind with your mortgage, keep in touch with your lender

Sometimes it's just not possible to make your mortgage payments. An increase to your mortgage payment, separation from a partner, redundancy, accident or injury can all seriously hamper your ability to repay your mortgage.

However, one of the worst things you can do is bury your head in the sand and hope your lender won't notice that you're missing payments – in fact it can make things a lot worse.

So, if you don't expect to be able to make a payment, speak to your lender early. They are required to be sympathetic to your situation, and they want you to stay in your home as much as you do (in that they want you to keep paying them interest for the remaining years of your mortgage term). You should also seek debt advice and find out what state benefits you may be entitled to.

You can find out more about the options open to you by reading this guide. You should also look at getting some free debt advice, from charitable organisations such as the Citizens Advice Bureau or the StepChange Debt Charity.

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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.