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WITH uncertainty over interest rates, it
is more important than ever for borrowers to control their
biggest financial commitment. Follow Richard Dyson's ten steps
for mortgage management.
1. Don't pay the SVR
THIS is the rate charged by a lender after
the borrower has completed the introductory part of a mortgage
deal such as a two-year fixed or discounted rate.
Inexplicably, one in five borrowers pays
SVR needlessly. That gives banks and building societies a golden
opportunity to reap hundreds ofms of pounds in extra profits
every year.
SVRs are now two or more percentage points
higher than the best discounted deals, boosting the ultimate
cost of a mortgage by 25%. A good two-year discounted rate is
about 4.25%, or £548 a month on a £100,000 repayment mortgage.
The Halifax SVR of 6.5%, on the other hand, equates to £683 -
135 a month more.
2. Find the best SVR available
NOT all borrowers want to remorgage few
years and some lenders are responding by offering attractive
long-term SVRs, often linked to the base rate.
The best at present is from Saffron Walden
Building Society, which offers SVR at base rate plus 0.3% for
life with no exit penalties. With the base rate at 4.5%, that
makes the deal 4.8%, or £579 a month on a £100,000 repayment
loan over 25 years.
3. Plan ahead for a remortgage
FOR borrowers who want to remortgage, the
process is simple and quick. But they must allow several months'
planning to avoid paying the lender's SVR. Mortgage statements
will make clear when the last payment on the introductory rate
is due - write it in your diary. Four months before, contact
your broker or lender to start looking for a new deal.
4. Do your research
There is an array of tables and
calculators on the internet that enable you to work out which
deal best suits your needs and what you can expect to pay. Just
search on UK Mortgage tables or UK mortgage comparisons.
When fixed rates appear cheaper than the
best discounted deals, it is typically a sign that lenders
expect the base rate to fall soon. If the lenders are right, it
would signal a fall in discounted variable rates, too. But
advisers generally tell borrowers to avoid trying to guess the
direction of interest rate changes and choose a fixed rate if
they want to know precisely how much their mortgage will cost
each month.
5. Calculate your expected mortgage
payments
THE internet gives borrowers the
opportunity to calculate complicated compound interest at the
click of a mouse.
On thisismoney.co.uk/tools,
for instance, borrowers may input any combination of mortgage
size, rate and term and work out their monthly bill, as well as
their total interest bill.
6. Beware hidden charges
THE phenomenal rise in remortgaging has
hit lenders' profits and they have reacted with an array of
extra charges. The biggest tend to be arrangement fees paid by
borrowers at the outset. These could be anything up to £900,
though £400 to £500 is typical.
Lenders also sting borrowers with mortgage
redemption fees of anything up to £295. These charges, which
the lenders protest merely reflect the costs of closing an
account, are subject to increase at any time.
7. Overpay your mortgage
OVERPAYING a mortgage is not only sensible
from a risk viewpoint, but can be tax efficient, too.
Penalty-free overpayments are allowed with flexible mortgages
and by home loans that have an offset facility where savings or
a current account surplus reduce mortgage debt. The advantage is
that the overpayment may be accessed if needed.
Leaders in the current account mortgage
market are Intelligent Finance, First Direct and the One account
from Royal Bank of Scotland. Sally Laker of broker Mortgage
Intelligence in Bournemouth, Dorset, says: 'The rates charged on
flexible or offset loans are not the best available because you
pay a premium for the flexibility. So don't take on this type of
deal unless you intend to overpay.'
Overpaying is tax efficient because the
benefit is equivalent to the rate the borrower pays on the loan.
To get the equivalent benefit of overpaying a mortgage charged
at 4.5%, for instance, a basic-rate taxpayer would have to find
a deposit account paying 5.625% gross. A higher-rate
taxpayer would have to earn 7.5% gross.
8. Pay lump sums off your mortgage
MOST lenders allow ad-hoc repayments of
capital, sometimes limited to a proportion of the loan
outstanding per year. But beware - this is not like overpaying,
because the money cannot be accessed again without remortgaging
and withdrawing equity.
'Unless you have a mortgage that allows
overpayments, don't pay off chunks of the debt unless you are
quite certain you will not need that money again,' warns Laker.
David and Karen Thompson (pictured) from
Cardiff have just signed up to a two-year fixed-rate deal with
the Halifax. Part of the appeal is that the deal allows them to
clear 10% of the mortgage every year. David, 54, a contracts
manager for an electrical firm, and sales assistant Karen, 45,
are likely to be able to pay off this allowance with a lump sum
due this year from David's personal pension plan.
'It is more of a priority now to get rid
of the mortgage,' says David, 'but when we get the money, we
will have to think hard about using it that way as once paid, it
isn't easy to get it back.'
9. Cut the length of the loan term
BORROWERS may usually choose how long they
wish to take to pay off the debt. In an ideal world, the
mortgage should be whittled down to a manageable size ahead of a
borrower's retirement. The shorter the term, the better. Not
only is the mortgage cleared early, but the overall cost of the
debt is diminished. Monthly repayments are higher, of course.
A £100,000 repayment loan at 4.5% costs
£556 a month over 25 years with a total repayment, including
interest, of £166,700.
However, reduce the mortgage term to 15
years and the total bill adds up to £137,700, saving £29,000.
But the monthly cost is £765.
10. Play safe
KEEP the equivalent of three months'
mortgage payments in ready savings as a buffer. Where part or
all of a mortgage is interest-only, check every six months that
the repayment vehicle earmarked to clear the debt - whether an endowment,
Isa, pension or other asset - is on track.
The performance of some endowment policies
has improved lately, but most still lag behind mortgage targets
by thousands of pounds.
Article by
Richard Dyson, Mail on Sunday
15 January 2006
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