How to cut mortgage costs
Mortgages can be expensive. Here are a few ways you may be able to reduce your costs.
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Remortgaging involves switching your mortgage debt from one lender to another, or switching to a different mortgage deal with the same lender. Remortgaging could reduce the cost of your monthly payments if you can get a better interest rate elsewhere.
However if you're thinking of remortgaging to reduce costs, remember that it's not only the interest rate that you have to take into account:
- During the introductory period on your mortgage there may be exit fees. Check how much these fees are and when they are due to end with your current provider.
- The new mortgage might have a booking fee or application fee.
- There may be legal, valuation and survey fees involved in switching to a new mortgage, although some providers offer dedicated remortgage deals that cover these costs for you.
- A new provider may have tighter lending criteria, so they may not be able to offer you that lower interest rate you've seen advertised.
If you do find a better deal elsewhere and you're intending to switch, tell your current provider. They might be able to match or beat the new rate you're thinking of switching to in order to keep you as a customer.
Overpaying on your mortgage
Overpaying on your mortgage can help to reduce the size of your mortgage loan. Because overpaying reduces the term of the loan, you're also saving interest. With some lenders, this means your monthly payments could fall too.
You can usually overpay on your monthly payments or in a lump sum. Most mortgage providers will allow you to make an overpayment of up to 10% per year without a penalty charge, but you should check this. Before you make overpayments on your mortgage, consider whether you'd be better off doing either of the following:
- Using the money to clear a more expensive debt.
- Putting the money into a savings account if the interest rate offered is higher than that on your mortgage.
Remember that, if you choose to overpay on your mortgage, you might not be able to access this money again, depending on your lender's overpayment rules. To cover life's emergencies, it's wise to have an easily accessible rainy-day fund.
Paying fees upfront
Paying your mortgage fees upfront is another way to reduce your monthly payments.
When you take out a mortgage you usually have the choice to pay fees upfront or add your fees onto the mortgage loan. Adding fees to your mortgage loan will mean that you're paying more in the long term because the fees will accrue interest. Because your loan will be bigger, so will your monthly payments.
However, paying fees upfront can be a considerable financial outlay at the start of your mortgage.
Paying more to pay less for a limited time
If you're struggling to meet your mortgage payments, you might be able to take a payment holiday. A payment holiday is when you and your mortgage provider agree that you will suspend your payments for a fixed period of time.
When you take a payment holiday interest is still charged on your overall debt. This means that, for the duration of the payment holiday, the total mortgage loan that you owe will increase.
Remember that if you miss a mortgage payment without the agreement of your mortgage provider, your home could be repossessed.
Beware of the penalties
Depending on the terms of your loan, any of the options above could incur charges and penalties, so check with your lender before taking any action. Be aware of your financial limits when assessing your options, as missing mortgage payments can have a serious effect on your credit rating, and you could face repossession. By contrast, never missing a payment can have a positive effect on your credit rating, which could help when it comes to switching lenders if you do decide to remortgage.
If you'd like advice on mortgages or remortgaging, speak to a mortgage adviser.
Last updated: 27 May 2015