WHERE SHOULD YOU INVEST TO GET RICH IN 2018?
Our ingenious New Year trick will help you ...
HOMEOWNERS could slash thousands of pounds from their mortgage costs by preparing
now for the looming interest rate hikes.
Rates could rise 0.5 percentage points by 2020, the Bank of England has warned.
That would push the cost of a typical £150,000 mortgage from 2.5 pc to 3 pc, adding £38 to monthly repayments.
If you started paying this extra £ 38 into your mortgage account immediately, you could save a huge amount of money — and your family budget won’t feel the pinch when rates do eventually rise.
The reason you save money is that overpaying on your mortgage cuts the size of your debt on which you pay interest.
As a result, you’ll have handed the bank far less in interest overall by the time your loan term is up.
It’ll also mean you pay off your loan more quickly.
At 2.5 pc the monthly payments on a £ 150,000 mortgage will currently be £673.
If you upped them by £38 to £711 for the next two years, you’d slash £1,283 off your total interest bill for the rest of the mortgage term, according to calculations by broker L&C Mortgages.
As an added bonus, your loan would also be paid off four months early.
If you carried on overpaying by £38 for the rest of the 25 years you’d cut £4,114 off the cost and clear the debt one year and eight months early.
If you have a larger £300,000 mortgage, the savings are even greater.
The typical monthly bill would rise from £1,345 a month to £1,423 under Bank of England plans.
If you started paying the extra £78 a month now, you’ll end up saving £2,564 in interest and pay off the debt four months early.
If you kept overpaying by the same amount after your mortgage bill rises, you’d save £8,227 and cut the term by one year and eight months.
The rock- bottom cost of mortgages over the past decade has freed up some income for most homeowners.
If you don’t have anything spare, you’ll need to find the extra before rates rise.
The more of this cash you use to overpay your mortgage now, the better the results.
On fixed-rate mortgages, banks typically allow you to overpay around 10 pc of the total borrowed each year without penalty. So if you have a £150,000 loan you can pay off up to £15,000 each year. Some lenders, such as Metro Bank, Atom Bank and Tesco Bank will allow you to overpay by up to 20 pc — or £30,000 on a £150,000 loan. With tracker mortgages, there usually aren’t any restrictions on overpaying.
David Hollingworth, of mortgage broker L&C Mortgages, says: ‘ There’s a very strong case for overpaying at the moment: as well as slashing your overall costs and getting mortgage- free more quickly, you’ll be used to the higher repayments when rates rise and won’t feel the pinch. You’ll thank yourself later.’ Borrowers who are currently on expensive rates can switch to cheaper deals and get the rewards without having to increase their monthly payments. Around 3 million homeowners are on standard variable rates. This is the rate you move on to once your fixed rate deal comes to an end. These socalled SVRs are usually more expensive than fixedrate mortgages. For example, the average two-year fixed rate is 2.35 pc, whereas the average SVR at the moment is 4.74 pc. At 4.74 pc on a £150,000 mortgage, you will be paying £854 a month. By switching to Coventry Building Society’s 1.75 pc five-year fixed rate you could save £236 a month.
If you continued to pay £854 a month, rather than pocketing the savings, your loan would be repaid in 16 years rather than 25.
On top of that, you would save £11,903 in interest.
Overpaying is as simple as setting up a standing order to your mortgage account. Some lenders will use this cash to pay down the debt immediately; others will wait until the end of the year.
Remember that once you overpay on the mortgage it’s hard to get it back without remortgaging. So you’ll need to weigh up whether you need the cash more urgently for other purposes. If you do, perhaps consider an offset mortgage. This type of deal links your savings to your mortgage.
Your bank subtracts what you have in savings from what you owe on your mortgage so you pay interest on a smaller sum.
A borrower with a £ 150,000 mortgage and £30,000 in savings would pay interest on only £120,000. If your rate is 2.5 pc, it will cost you £673 a month.
But because you are only paying interest on £120,000, instead of the full £150,000 loan, you will slash £21,706 off the total amount you have to pay.
You will also pay off your mortgage two years and eight months early.
The difference is you can get at your savings whenever you like.
Andrew Montlake, of mortgage broker Coreco, says: ‘If you can afford to pay a little bit extra each month, or put money into an offset account, the rewards can be huge.
‘For most people, paying off your mortgage as soon as possible is the most sensible thing to do.’