interest rates and mortgages etc
Well it has been a while since I updated here mainly as there has been little change on things like interest rates etc. Whilst inflation has been coming down the past few months wages have not kept up due to pay freezes etc.
Mortgages - now this is the biggest debt many of us will ever take on. As interest rates have been cut this has also had the same effect on those of us on tracker and variable rate mortgages. However, some of my friends have seen their repayments fall by hundreds due to this but they have not taken my simple advice - overpay the mortgage. This is particularly important if you are on an interest only mortgage. An overpayment is a payment in addition to your minimum monthly payment which reduces the capital you owe. A lower capital means less to charge interest on so more of your minimum monthly payment reduces the capital hence you can pay it off more quickly.
If you can easily afford your minimum payment and all your other bills then request the overpayment is used to reduce the term of your mortgage as this will save you more in the long run as the minimum repayment is not changed. If finances are a bit tight at times then it may be more sensible to reduce your minimum payments until your budget gives you some breathing space.
How reducing the term works:
for this I am using a mortgage of £150,000 on an interest only deal (it's the easiest to show with) with an interest rate of 4.75%
with a £150,000 mortgage at 4.75% interest would be £593.75
on an interest only mortgage this will also be your minimum payment.
So Month 1 (no overpayment)
Capital £ 150,000
Minimum payment £ 593.75
Interest £ 593.75
Capital remaining £ 150,000
Next months interest £ 593.75
Month 2 (£450 overpayment made)
Capital £ 150,000
Minimum payment £ 593.75
Interest £ 593.75
overpayment £ 450
Capital remaining £ 149,550
Next months interest £591.97
so you have reduced your interest by £1.78 pcm.
Now if you use this to reduce your mortgage term then your minimum payment stays the same and this £1.78 ALSO comes off the capital the following month. Now I know this does not sound like much but with regular over payments this will increase. With my mortgage I have now built up a difference between my minimum payment and the interest of just over £20 pcm which if I make no further over payments and interest rates stay the same (I know that is unlikely) equates to paying off £5520 by the end of the term.
The big advantage to over payments is that you are also increasing your equity in the property hence if you decide to take your mortgage else where or your deal is coming to an end and you decide to stay put you will need a lower loan to value amount and so a lower interest rate.
How to get the most out of your over payments
Before you make over payments check with your mortgage provider when interest is calculated. Some will do this daily, others monthly and a few annually. Also check to see if there is a limit to how much you can overpay either each year or each month and DON'T go over it or you will be charged extra for it.
If it is done daily then you get the benefit form the day after you make the overpayment. If it is done monthly the a bit of timing is needed so your overpayment is done before the day it is calculated.
The tricky one is if the calculation is annually. Lets say your interest is calculated on the 25th April each year. If you make an overpayment on the 1st of May it will have absolutely no effect on your repayments until the 25th April the following year. Here it may be best to build up an overpayment in a savings account during the year then make one big overpayment a few days before the calculation date to get the full benefit.
Mortgages - now this is the biggest debt many of us will ever take on. As interest rates have been cut this has also had the same effect on those of us on tracker and variable rate mortgages. However, some of my friends have seen their repayments fall by hundreds due to this but they have not taken my simple advice - overpay the mortgage. This is particularly important if you are on an interest only mortgage. An overpayment is a payment in addition to your minimum monthly payment which reduces the capital you owe. A lower capital means less to charge interest on so more of your minimum monthly payment reduces the capital hence you can pay it off more quickly.
If you can easily afford your minimum payment and all your other bills then request the overpayment is used to reduce the term of your mortgage as this will save you more in the long run as the minimum repayment is not changed. If finances are a bit tight at times then it may be more sensible to reduce your minimum payments until your budget gives you some breathing space.
How reducing the term works:
for this I am using a mortgage of £150,000 on an interest only deal (it's the easiest to show with) with an interest rate of 4.75%
with a £150,000 mortgage at 4.75% interest would be £593.75
on an interest only mortgage this will also be your minimum payment.
So Month 1 (no overpayment)
Capital £ 150,000
Minimum payment £ 593.75
Interest £ 593.75
Capital remaining £ 150,000
Next months interest £ 593.75
Month 2 (£450 overpayment made)
Capital £ 150,000
Minimum payment £ 593.75
Interest £ 593.75
overpayment £ 450
Capital remaining £ 149,550
Next months interest £591.97
so you have reduced your interest by £1.78 pcm.
Now if you use this to reduce your mortgage term then your minimum payment stays the same and this £1.78 ALSO comes off the capital the following month. Now I know this does not sound like much but with regular over payments this will increase. With my mortgage I have now built up a difference between my minimum payment and the interest of just over £20 pcm which if I make no further over payments and interest rates stay the same (I know that is unlikely) equates to paying off £5520 by the end of the term.
The big advantage to over payments is that you are also increasing your equity in the property hence if you decide to take your mortgage else where or your deal is coming to an end and you decide to stay put you will need a lower loan to value amount and so a lower interest rate.
How to get the most out of your over payments
Before you make over payments check with your mortgage provider when interest is calculated. Some will do this daily, others monthly and a few annually. Also check to see if there is a limit to how much you can overpay either each year or each month and DON'T go over it or you will be charged extra for it.
If it is done daily then you get the benefit form the day after you make the overpayment. If it is done monthly the a bit of timing is needed so your overpayment is done before the day it is calculated.
The tricky one is if the calculation is annually. Lets say your interest is calculated on the 25th April each year. If you make an overpayment on the 1st of May it will have absolutely no effect on your repayments until the 25th April the following year. Here it may be best to build up an overpayment in a savings account during the year then make one big overpayment a few days before the calculation date to get the full benefit.
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