Homeowners searching for ways to budget as the cost of living increases could make big savings by cutting the cost of their mortgage. Amanda Aumonier offers suggestions for how you can reduce your repayments
Households are facing enormous pressure when it comes to their finances. Alongside soaring energy costs and rising inflation, homeowners are also grappling with increasing interest rates which can have big implications for monthly mortgage repayments.
We estimate since December 2021 homeowners on a standard variable rate could be paying an extra £656.04 per year on their mortgage due to the shifts in interest rates.
As finances are undoubtedly facing a tough climate, now is the perfect time to look at how you can save on your mortgage.
Remortgaging
For anyone approaching the end of their current deal, remortgaging should be your first port of call when it comes to ways to cut household costs. It’s best to take advantage of the current deals sooner rather than later while rates are lower.
Our previous research found that people can save an average of £3,900 a year by remortgaging, which is equivalent to 15% of the UK’s average salary.
You may have to pay an early repayment charge (ERC) to your existing lender if you remortgage, but it’s important to remember that you can remortgage six months before your deal ends.
Long-term fixed rates
With the financial climate looking so uncertain, fixing your monthly payments can help provide financial stability and ease the worry for many.
There are still some great five-year deals on the market, especially for those who need to borrow at a slightly higher loan-to-value (LTV) ratio.
Five-year fixed rates tend to have slightly higher interest rates than two-year fixed rates. However, committing to paying a little extra each month now could be a great relief should rates, and the price of living, continue to rise.
Green Mortgages
A green mortgage essentially rewards you for having an energy efficient home by offering you more favourable rates.
Check Energy Performance Certificate (EPC) rating of the home you are currently in or any new purchase as savings could be made here. EPC ratings of A or B are the highest and therefore qualify for the best deals.
Green mortgages can offer lower mortgage rates, cashback when you take out the mortgage, or additional borrowing at lower rates.
NatWest, Halifax and Barclays offer green mortgages, with NatWest offering a reduced rate on a two-year or a five-year fixed-rate mortgage, along with cashback.
Part and part mortgages
Some lenders offer part and part mortgages, which can be an effective way of reducing your monthly payments. As the name suggests, some of the mortgage is loaned on a repayment basis and some is interest-only.
Good brokers can fit these products to suit your needs and then make sure you have an overpayment clause to allow you to take advantage and pay off more when any extra income comes in.
Part and part mortgages are not suitable for everyone, and lenders will want evidence that you can still comfortably keep up with your monthly payments. Speak to a broker to discuss what options could work for you.
Overpayments
While rates are still low, now could be a good time to start paying a little bit extra every month, or as a one-off, if you can.
What’s more, during times of economic uncertainty, injecting more money into your home could be a safer bet than other investment opportunities.
Most mortgages allow you to overpay by up to 10% per year – check your criteria to see if this applies to your mortgage as the amount that can be saved by doing this regularly is staggering.
Overpaying by just £50 per month can knock almost two years off your mortgage and save you over £5,000 during its lifetime.
Offset Mortgages
Offset mortgages link your savings account to your mortgage – this means lenders will treat any savings you have like mortgage overpayments.
You will still be able to dip into the savings you’ve chosen to offset, but this will affect the interest you pay. You will also need to have your savings and mortgage with the same provider.
Deposit Size Matters
It may be tempting, if you are a first-time buyers, to take the first deal you are offered in a bid to take that vital first step on the property ladder. However, if you are new to the market, we would advise saving as big a deposit as possible.
A larger deposit will give you access to deals with lower interest rates. This means not only will your monthly payments be smaller, but you will also end up paying less over the lifetime of your mortgage.
It’s also common for young buyers to look for help within their family at this stage, with 40% of buyers stating they now need help from loved ones to purchase their own home.
Ideally, a 20% deposit is a good starting point, but if a 25% were to be obtainable it is likely even better rates will be available.
Trussle’s best first-time buyer mortgage is a two-year fixed rate at 1.68% from Principality Building Society.
Amanda Aumonier is head of mortgage operations at online mortgage broker, Trussle
