Living the “American way” often times refers to living a lifestyle filled with a happy marriage, adding a few kids to the mix and of course a job that comes with a nice salary, which ultimately comes with the financial opportunity to buy a home. Sounds ideal, right? Well, did you ever stop to think about the homeowner welcoming package filled with a 30 year mortgage? Sounds like a bigger commitment these days than an actual marriage. Consider the following ways to help cut a few of those costs out of your mortgage, which can be slang for debt, if you’re not careful managing your finances.
CUT COST OF YOUR CURRENT MORTGAGE
A mortgage is like any other kind of debt. Really you are renting the money, so the longer you take to pay it off, the more it will cost you. By overpaying when possible you can save tens of thousands of pounds and be mortgage-free much earlier.If you pay it off over a shorter time you have to pay more each month, but if you can afford it it’s worth doing. Ring your lender and ask how much your monthly payments would be if you reduced the payment term by, say, 10 years. If you can manage the new figure then go for it.With some mortgages you can even arrange with your lender to pay off extra chunks during the year as and when extra money comes in. That’s the best thing to do with a mortgage that calculates interest daily, as any money you put in will have an immediate effect on interest you pay. Paying off your mortgage quickly is also a tax-free form of investing. If you have some extra money to invest you could put it into a savings account but unless you put it in a cash ISA you would pay tax on any interest you make. However, if you put that money towards paying off your mortgage you won’t be taxed on it as the Inland Revenue doesn’t think of it as investing but as paying off a debt.
Some mortgages (typically fixed-rate ones) don’t allow you to pay them off more quickly while they are in the fixed period.Some allow you to pay around 10 percent of the debt each year but not much more. Mortgage lenders want you to pay off your debt as slowly as possible so they can make as much money from the interest as possible. So first check that there are no penalties if you decide to make an extra/higher repayment. If there are penalties but you are able to save extra money each month, then put this cash in a high-interest savings account while you’re in the fixed period. When your fixed rate period ends pay a lump sum off the capital (the actual amount you have borrowed). You could also then consider switching to a flexible mortgage which will allow you to pay back extra without penalties after that.
Switch to an offset mortgage
This can be a great way to pay off your mortgage faster, particularly if you have a healthy pot of money in savings. It works by taking into account your savings and anything in your current account, when the mortgage company calculates the interest you need to pay on your loan. So they “offset” savings against your mortgage. You will still pay the same amount into your mortgage each month but more of that payment will go towards paying off the actual debt (the capital) than wasting it on interest.
What are called current account mortgages work in the same way so all the money in your current account is offset against the money in your mortgage. If you regularly have a high balance in your account and you have some significant savings then it could be worth going for an offset or current account mortgage.
Watch the fees if you switch
There are a lot of very good low rates in the market so if you are not tied to a fixed-rate mortgage you could save a lot by switching. However, there are often big costs involved in switching including your current provider’s exit fee, the new lender’s arrangement fee, legal costs and valuation fees. Sometimes lenders hike up their fees so that they can push down their interest rate and put the mortgage at the top of the best buy tables.”Depending on the size of your mortgage and the length of time you have to pay it off it can be worth going for a slightly higher interest rate so that you don’t have to pay big upfront fees,” says David Hollingworth of mortgage broker London & Country. “Some lenders give incentives such as free valuation and legal fees but the interest rate is usually higher with those. If you have a large mortgage it can be worth paying the upfront fees to get a cheaper overall interest rate.”
An easy way to knock years off your mortgage repayments without sacrificing your quality of life is to rent out a spare room. Even better, this income is tax free! You can take advantage of the scheme as long as the room you are renting is furnished and in your own house, not a separate property. If you can’t bear the idea of a stranger in your home permanently, you can always rent for a few weeks at a time to foreign students.
CUTTING COSTS FOR FIRST-TIME BUYERS
The good news is, if you’re a firsttimer and you don’t have much cash to put down there’s help at hand to get you on the ladder, even if you have a small deposit.Help To Buy scheme
The Help To Buy scheme is a Government deal whereby first-time purchasers can buy a new-build property (it has to be a new-build, not an old house) with just a 5 percent deposit. Usually, if you only have 5 percent to put down on a property the mortgage will be expensive as lenders don’t enjoy handing out 95 percent loans. But with this scheme the Government lends you up to 20 percent of the price so you only have to get a 75 percent loan, which will be much cheaper.
Opt for a shorter term mortgage
Another way to save cash if you only have a small deposit is to go for a short-term fixed deal (they tend to be cheaper) and then look to switch after that. Adrian Anderson, director of mortgage broker Anderson Harris, says: “If you only have a small deposit, consider taking out say a two-year fix rather than a five-year deal. “If property prices keep rising, in two years’ time you will have a better equity stake in your home so will be able to remortgage on to another deal at a lower rate of interest.”
Shop around for the best mortgage deal
It sounds obvious but not everyone shops around for a new mortgage. Some just go to their bank to find what they could offer and then pick the best deals they have. However, you can save thousands over the course of the mortgage by choosing from the whole of the market.
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