How to cut your monthly mortgage payments
Today's rise in interest rates means many people's mortgages will go up. Since August last year, when rates were 4.5%, rates have been hiked four times, adding £63 a month to a £110,000 repayment mortgage.
There are three ways to reduce your monthly repayments: remortgage, switch to an interest-only mortgage, or extend the life of the loan.
Remortgaging can be the "financial equivalent of liposuction", according to personal finance website MoneySavingExpert.com. But there are hidden dangers. You need to be able to move without penalty - if you are locked into a mortgage with exit fees these can quickly negate any savings you might make. Arrangement fees on the new mortgage can also cost a lot, in some cases more than £1,000.
"Remortgaging might allow you to take advantage of a lower rate," says a spokesman from the Council of Mortgage Lenders (CML), "but you need to make a careful assessment of the administration, valuation and arrangement fees. It's not just a matter of looking at the headline rate."
This is particularly true at the moment: attractive headline rates of 5.23% lock lenders in for five years and have a hefty upfront arrangement fee. The benefit is that borrowers know how much their repayments will be for the next five years, the downside is that if interest rates fall they will be paying over the odds and be unable to switch until 2012.
Switching to an interest-only mortgage will cut your monthly bill substantially. On a £150,000 repayment mortgage a shift to an interest-only one will see repayments drop £250 from £900 to £650. However, the downside is that you won't be paying back any of the original loan.
"Switching to an interest-only mortgage will reduce your payments," agrees the CML, "but only puts to one side the issue of repaying the capital you have borrowed.
"It may be an option if you know an inheritance is on the horizon or your circumstances are due to change, but you need to have a plan for how you will repay the original sum."
The third option is to extend your mortgage. "This will reduce your monthly payments but will increase the amount you repay over the whole term," explains the CML.
Extending a 25-year mortgage to 30 years, for example, would mean monthly repayments would drop from £614 a month to £567, although the total interest paid would increase by £20,000 from £84,227 to £104,404.
Good loans gone bad
There were 17,000 repossessions last year, according to CML figures, a far cry from the 247,000 homes taken back by lenders during the recession years of 1990-1993. Back then, interest rates of up to 14%, higher unemployment and economic instability created a nightmare situation for many families.
A return to such a scenario is unlikely, says the CML. "We have a more stable economic and interest rate climate."
Rates are still relatively low while lenders are also "more sophisticated at working out affordability," and show "more flexibility" in negotiating with defaulting borrowers, adds the CML.
If borrowers do find themselves unable to pay their mortgage it is important to take action quickly, says the CML. "The most important thing is to talk to the lender. They will try and work it out with you."
Lenders may well suggest the loan is remortgaged or extended, while some might offer a payment holiday. "Each situation will be tailored to individual circumstances," says the CML.
Source: guardian.co.uk
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