by Mark Johnston
Everyone is looking to secure the best deal on their mortgage especially now that there is a real threat of interest rate increases.
The Bank of England’s Monetary Policy Committee have held UK interest rates at 0.5% for 22 months now but things may well be about to change. Inflation is now at 3.7% which is almost double of the 2% target set by the coalition government. Because of this analysts are predicting that interest rates will increase a lot sooner than many expected. Borrowers on variable and tracker mortgages who are concerned about how changes will affect their monthly outgoings have already started to look for a better deal.
Those with large deposits or a lot of equity in their homes will get a much cheaper rate of interest. The general rule is that the lower the loan to value the lower the rate of interest, this is because the more equity a borrower holds in the home the less the risk to the lender.
Before the financial crisis and the credit crunch, many providers offered mortgages to borrower at 100% loan to value which meant they needed little or no deposit, some providers like the ill fated northern rock even offered loans up to 125% of the value of a property. Following the massive losses caused by the financial crisis which resulted in a Northern Rock being the first bank in a hundred years to suffer a run, lenders have to revise their lending criteria. Mortgages with loan to values of over 90% are practically unheard of without some other way of providing security for the loan. A leading Independent mortgage broker last year saw average loan to value ratios for home loans drop to just over 50%
The low interest rate has enabled many savvy borrowers to pay more off of their mortgage each year. Making overpayments can literally save borrowers thousands over the term of their mortgage. Making additional payments reduces the outstanding balance which results in lower interest payments, overtime this can mean borrowers save thousands in interest payments alone and pay their home loan off a lot earlier giving them financial freedom in later life. Its worth finding out if a lender allows overpayments, many providers enable borrowers to make up to 10% overpayments per year with a penalty charge.
An example of the types of savings would be taking a typical mortgage of £150,000 over a 25 year period. With a 3.75% rate the monthly repayment would be £771.20. Borrowers paying only marginally more each month of say £50 would pay their loan off two and a half years early and save a massive £8,800 in the process. The more that a borrower can afford to pay off, the bigger the savings . Pushing the additional payment up just £30 to £80 would pay the mortgage off three and a half years early whilst saving £13,000.
It’s easy to see why overpaying can make great savings and some lenders even allow underpayments if overpayments have been made in the past. This allows the additional overpayments to be used when times are tough and can result in borrowers being able to take a break from their monthly mortgage repayments altogether.
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