Before we read about saving on the mortgage, lets first understand some of the terminology used for one of the biggest gambles you will ever make in your lifetime.
Capital and Interest Mortgages
This type of payment facility will leave you with nothing to pay at the end of the term. Capital and interest are paid together. In the early stages of the repayment, only small amounts of capital are being paid. However, you are slowly chipping away at the capital, thus as the term comes to an end more capital is paid and less interest is being charged on the amount outstanding. This is the safest but most expensive payment facility.
Interest-Only Mortgages
With this payment facility you will only pay the interest back to the lender every month. You will not be paying any capital. At the end of the term you will have the original amount of capital borrowed to pay back. This is the least expensive way to pay your mortgage, but is the most dangerous. You will need to have some type of payment vehicle in place in order to make up the capital amount borrowed. This can be a savings plan, endowment policy or you can take a gamble on the house price rising and downsizing in property at the end of the term on the mortgage. The equity in the house could pay off your outstanding capital.
This is a good facility for house developers, or a short-term release for existing borrowers on capital and interests mortgages, to make adjustments to their personal finances.
Part Endowment And Part Capital And Interest
These are known to most of the older generation as the famous "miss sold mortgages". Customers parted with investments into endowment policies that had massive short falls on them, so customer where left with thousands of pounds to pay at the end of the mortgage term.
This facility allows you to put a percentage of the capital on repayment and the additional amount on interest only. This in turn allows the borrower to have a lower monthly payment. This gives them the opportunity to invest the rest of the expected monthly payment in the stock market. A promising idea in principle but there is the possibility and proof, that the shares don't do so well and the customers projected profit will be less than originally desired.
This idea was designed to leave the customer with a profit at the end of the mortgage. This was not the case for thousands of customers.
Products
Products work with the payment facility and make the mortgage more affordable for customers willing to purchase homes. The three main types you will be aware of are: -
Fixed Rate
This is the most desired product as it lets the customer know exactly how much the have to pay on the mortgage every month. The rate offered by the lender will depend on the bank of England base rate. Lenders will normally charge a few percent above this. This is so they make more profit and you pay the hidden tax costs.
Tracker Rate
This is very simply to understand, but most customers seem put off because it seems confusing at first. This product fluctuates with the bank of England base rate. The lender will book you a rate slightly bellow or above the Base rate. This in turn can make your payments cheaper one month but slightly more expensive in another. Again, it is a risk but can save you a great deal in interest charged to the capital outstanding on the mortgage.
Variable Rate
This is like the tracker rate but is normally slightly more expensive than the tracker. This rate will always be above the bank of England base rate by a few percent. This is popular with customers who don't like being tied in for a certain amount of time. This product offers more flexibility with over payments, no booking fees or suits customers who like to move around to different lenders depending how the finance market is performing.
Terminology
Porting - used when keeping your product but moving to a new home.
Redemption - final figure owed on the mortgage. Used when moving to a different lender.
Loyalty scheme - used when staying with the same lender when your product is coming to an end.
Capital - amount of money originally borrowed from lender.
Interest - what the lender charges on the capital.
The Early Repayment Charge
If you decide to go with a fixed rate or a tracker product the lender will normally charge you a booking fee. This is normally around £500 to £2000 pound, based on the product and the term you decide to go with. If you can afford to pay this up front then do so, as this will only be added to amount outstanding on the capital, to which you will pay interest on for the rest of the term.
If you decide to come out of the product early this can cost you hundreds to thousands of pounds. This figure is based on the amount of term you have remaining on the product. The earlier you come out of the product, the more it will cost you to do so. This in effect stops you the customer from shopping around and looking for the best's deals at any desired time. In retrospect the lenders charge you to take it out and charge you to change your mind. This is so they don't loose your money made on interest every month and make the most amount of profit attainable from that facility.
If you take out a tracker or a fixed rate, stay with it until it's up for renewal.The Overpayment
Due to the competitive finance market, lenders have been offering customers the opportunity to overpay on the mortgage. With trackers and fixed rates this is a limited percentage every month. The reason for this, again - is because it's a booked rate, which offers the customer more certainty on monthly payments.
If you overpay by £100 every month on your mortgage, you can save between 2 and 3 years on your term and interest charged to the account. The simple reason for this is because the overpayment comes straight off the capital remaining on the facility. The overpayment allowed amount depends on the lender and contract signed. If you were to pay £500 per month with the overpayment method, this could in effect cut your term and interest in half.The Direct Debit Or Standing Order Change
This only works if you pay your mortgage at the beginning of the month. Your monthly payment covers you for the whole month. It doesn't matter if you pay it at the beginning or the end, you're covered for that month. If you move your payment from the 1st of the month to the 28th of the month, you have in effect given yourself an extra month to make the payment. This can be used if money is tight in one month, and can only be done once throughout the lifetime of the mortgage.
The Loyalty Scheme
Most lenders will offer a good loyalty scheme for existing customers. When your product comes to an end, check out the lenders web sites or simply give them a call on their free number. Ask them what offers they have for existing customers. This should be very competitive and save you money on interest compared to the rest of the market.
Porting
Don't worry if you have been house hunting and found the house of your dreams. If you're tied in with a 5year product for example, and have 3 years left to go, don't go to another lender and go through the whole process again. Port the product with you. This will save you a hefty amount in early repayment charges. If you need extra borrowing a good lender will offer you the extra, at the rate of your existing product.
Daily Interest Charge
When you make your monthly payment it will come off the capital straight away. This will make the redemption figure less. The longer you wait to complete on a mortgage after making this payment, the more interest is being charged to the account again for that month. If worked out properly this can actually save you a few hundred pound depending on the new rate change and amount borrowed.
Offset
Some lenders will let you offset all our income and savings against the mortgage. This is like having one banking account, but with everything attached to it. This in effect reduces your amount borrowed thus reduces the amount of interest being charged on a daily basis. So when you get paid from your employment this automatically reduces the capital, which means less interest charged.
Underpayments
Lenders normally charge your account on a daily rate of interest. This means interest is charged to the mortgage account on a daily basis, in connection with the total amount borrowed. The way to make a saving on this relates to the timing of when you're actually swapping lenders.
This works in conjunction with overpayments. When you make your overpayments to your mortgage account, you actually go into credit. This credit builds up and makes your interest cheaper. If you're personal circumstances change or you need to pay off revolving debt, such as credit cards and store cards, you can miss your mortgage payments because your overpayments will account for it. The credited amount will go back onto the capital but you are paying it back at a lower rate of interest. This lets you pay off any outstanding debt, which is at a higher lending rate.
