Actions To Ease The Mortgage Pain
By admin • Jul 15th, 2007 • Category: Mortgages
There have already been several interest rate rises since August 2006, taking the Bank of England’s base rate from 4.5% to 5.75%.
In recent speeches Governor Mervyn King has virtually promised to make further rises, and the money markets are already beginning to factor in two more quarter point increases. Another batch of fixed rate interest mortgage products were pulled last week, reducing the chance for borrowers to find a good deal before interest rates rise again – almost certainly in July. The next rise is as good as done already. Borrowers have been feeling the strain, but are there any actions they can take to ease the pain?
Extending the term of your mortgage can make short term sense. Although it does mean you will pay more interest in the long run, and extended term will reduce your payments. And, assuming you come to remortgage again in two years, you can always reduce the term at that time, or overpay when you can afford to do so.
If, for example, you have a £250,000 repayment mortgage with 15 years remaining, and extension of one year would reduce payments by £81.96 a month, or by £153.72 for a two year extension, based on a Halifax two-year fixed at 5.49% (fee £999). The one or two year addition would mean more to pay in the long run, but we are talking about reducing payments in the short term for these difficult times.
If you are on the brink of remortgaging, it may be worth considering taking out a mortgage for more than you need and then repaying the difference immediately. The benefit of this is to give you an option of making underpayments of taking payment holidays in the future, so long as the mortgage terms allow this.
For example, if you have a £300,000 property and a £200,000 mortgage, you could take out a £210,000 mortgage and pay back £10,000 straight away. This gives you flexibility in the future because you have already overpaid. This can be useful for the self-employed who may have a ‘bad month’ from time to time. Such foresight could enable you to avoid missing payments and the subsequent hit on your credit rating.
Using some of savings might be a good idea too. You could pay of a chunk of your mortgage when you take out a new deal to reduce your monthly payments. On the same Halifax terms as mentioned above, you could put down £5,000, to make the loan £245,000, and reduce your monthly payments from £2,041 to £2,001. Using £10,000 savings would mean a reduction in monthly payments of over £80. This obviously saves you more in the long run.
Another use of savings could be to take out an offset mortgage. These are loans that enable borrowers to combine savings and mortgage into one account, thereby reducing the amount of interest owed, and thus pulling down those monthly payments.
So, there are actions that borrowers can take to ease the mortgage pain. But, make sure that you discuss these with your broker or lender so that you are acting within the terms of the mortgage, and are taking actions appropriate to your circumstances.
Tom Smith
15th July 2007
