A mortgage is quite possibly the biggest debt that any individual may have in their lifetime.
Here’s a few ways to reduce this debt and clear it earlier than you thought you would, saving yourself a good deal of money on your interest payments as you go along.
Tell everyone that this is what you are doing, after all they will wonder why you are not spending as much money or buying presents or going out as much. It also means that you have a couple of people who can be your accountability buddies and can keep you going in times of desperation!
Do the ground work first
Speak to your current mortgage provider and find out where you are at with your mortgage:
- Your outstanding balance – ask for a mortgage redemption statement.
- How flexible your mortgage deal is – are you on an interest only mortgage or repayment? Are there any restrictions with making overpayments or lump sum payments? Will there be any early redemption costs?
Once you receive your statement, you will then be able to tell whether you are going to be charged for early repayment.
Not everyone is charged, but if you are in certain deals, you will receive the charge, for example if you are tied in to a set interest rate for a fixed period of time, you will be contractually obliged to finish the term set out by your current provider. This could be for a fixed, discounted or capped mortgage rate.
Switching your mortgage
If you switch your mortgage to another lender you could save a great deal of money. Scenarios include finding a new deal that will allow you to make over payments or no early repayment charges.
If your property price has gone up, you may get a better deal because the loan to value figure will have lowered allowing providers to find more competitive interest rates due to the higher equity you have in your home.
Net House Prices, Zoopla and the Land Registry can help you get an idea of how much your property may be worth in your area. Price My Home and Mouse Price will give you an online valuation following a questionnaire you complete online.
How you can afford to do it?
Now you have the overall figure to pay off your mortgage you now need to work out whether you can afford to pay it off! Do you have the capital to make a one off payment? Or will it be a series of payments.
However you are able to do it, you must make sure that you have looked at your overall income and outgoings including lifestyle outgoings as it would be lovely to actually go out in the next 10 years!
So as a quick check, write down the following:
- Income – salary, extras, benefits, investment interest, dividends
- Outgoings – mortgage, utilities, water rates, council tax, TV, telephone and broadband, insurances, savings, food and petrol.
- Remember to plan for things like holidays, Christmas, birthdays and any future large events like weddings.
You need to be brutal about this as if you miss anything it can hit you later on especially if interest rates rise.
Evolution Financial Planning have a great free budget planner, which you can use to work all this out.
How do you make overpayments to your mortgage?
Now you have worked out how much you can put away each month, you now need to put that plan into action. Keep remembering that this is a good thing as it will mean you will pay less interest on your mortgage in total and you may be able to reduce the length of time you have your mortgage for, a win, win situation.
Increasing your direct debit
You can contact your mortgage provider to increase your direct debit payment, so the overpayment will be taken automatically.
Setting up an extra payment
You can set up a standing order or a regular payment from your current account. This will allow you to stop payments in advance if you need the funds for something else.
Using your savings
You may have savings that are sitting in an account not really earning a lot of interest. You may be able to use these savings to pay a lump sum off your mortgage. Remember your mortgage is at a higher interest rate than you are getting with your savings, and it always pays to get rid of debt first. However check with your mortgage lender about paying in lump sums as you may be charged for this or your mortgage may not even let you do it. Some mortgages allow an extra 10% above your agreed payments each year.
Sticking to your plan
There is no right or wrong way to do it, the important thing is that you have made a plan, and now you need to stick to it!
Give yourself a trial run if you are not sure whether you can stick to a budget, but do make sure that everyone in the household knows about it and agrees to help!