Following the numerous base rate cuts over recent months, many borrowers have seen their mortgage repayments fall sharply.  As a result a number of banks have reported that there has been an increase in the number of homeowners that are overpaying on their mortgages each month as a means of saving money.

Borrowers will find that by keeping their repayments the same even though interest rates have dropped they could cut years from their mortgage term and could also save thousands of pounds in interest over the term of the loan. Industry officials are advising consumers to overpay wherever possible to save them money and get out of debt more quickly.

As an example, a homeowner on a lifetime tracker mortgage paying around £1,000 per month a few months ago would have seen their minimum payment drop to £690 now. If rates stay at their historic low and the homeowner continued paying £1,000 per month, they could expect to save £16,000 over the term and pay off their mortgage nine years early!

The simple truth is that the cost of debt is normally much higher than the interest on savings. The exceptions are where there are penalties for clearing the debt or where the debt is exceptionally cheap for introductory purposes or other reasons.

Assuming you have various debts it’s common sense that you should pay off the most expensive ones first. As mortgages are normally cheaper than credit cards or loans, you should focus on paying the latter off first. One exception, however, is official loans from the Student Loans Company where the interest rate is significantly lower than elsewhere.

Once these more expensive debts have been repaid, now is the time to consider paying off your mortgage by diverting regular savings from elsewhere. In essence if your mortgage rate is higher than the net of tax savings rate you should look to start making additional payments towards your mortgage.

To illustrate this, if you had a £10,000 mortgage debt at 5%, your annual interest cost per annum would be £500. However, if you had savings of £10,000 receiving say 3% after tax you would be receiving £300 interest per annum. Diverting your £10,000 savings to repay part of your mortgage would save you £200 per annum!

However, before taking this course of action there are a couple of things to check first:

• If you are in a position to overpay your mortgage you need to check what your lender will allow you to do. Each lender will have different rules so check the small print first. For example some may let you overpay a maximum amount per month or a percentage of the capital borrowed per month or per year.
• Don’t divert too much towards your mortgage leaving you with no readily available cash for emergencies etc

If this all appears relevant to yourself give it some serious consideration and it may provide you with a great solution if you are looking for ways on how to save money in this climate.

Mortgage advice

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With reports of annual falls in property values of around 16% it doesn’t seem like using the words “dips” is quite right. Well, maybe, but like a lot of things you’ve got to put things in context. According to the Council of Mortgage Lenders (which all the main lending companies are members of) over two thirds of borrowers with negative equity have negative equity of £8,000 or less. And, unlike the last major episode of negative equity in the early 1990s it’s spread fairly evenly amongst borrowers and isn’t a first time buyer problem.

If we add in the upturn in mortgage enquiries and falling inter bank lending rates – a first sign that lenders might lend again soon- the overall picture should be that negative equity won’t spiral out of control, or may largely disappear as confidence returns to the housing market and prices get nudged upwards.

One of the slightly odd things about negative equity is that because valuing your home isn’t an exact science you may not know that you’re in negative equity. This isn’t all bad, because one of the best things to do is nothing! Having negative equity isn’t like an unauthorised bank overdraft; your lender isn’t going to start making threatening noises about repaying it. If you’re not having any problems in paying your mortgage or don’t plan to move house you’re fine. Keep saving money, over pay the mortgage if possible, and sit tight.

Even if you do need to move house the CML have said that its members will try to be helpful if you have a good track record of keeping up with your payments and the negative equity isn’t too substantial. Our tip for how to save time and effort in finding out your options is that you go to your existing lender – they may give you a sympathetic hearing.

If you are having problems in repaying your mortgage – and there’s no evidence that there’s a link between this and negative equity – make sure that you speak to your lender as soon as possible.

Lastly, just to keep things in perspective, there’s £2.1 trillion of unmortgaged equity in UK homes – that’s still an awful lot of money!

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Why we have fees is really a different discussion, but it’s probably partly down to too many lenders coming into the market and then having to prop up falling margins with ever more exotic ways of earning money from you the borrower. And, partly the fact that a fee helps keep the headline rate of a mortgage down, so that a lender can look better in best deals tables.

So, what are the main fees that you might have to pay to the lender today? These are an arrangement fee, an early repayment fee and an exit fee.

The arrangement fee is simply the lender’s charge to you for doing business with them.

An early repayment fee is the charge which the lender will levy against you if you want to pay off your mortgage early. Basically it covers the lender for their lost profits from not lending the money to you for as long as had originally been agreed.

The exit fee is the most controversial of the three fees because it’s the fee for doing the admin when the mortgage comes to the end of the agreed period. You might expect the lender to have thought that the mortgage would have to end at some point, and that they would take that into account when setting the mortgage up, wouldn’t you? Well not only do some lenders make a charge, but they’ve been upping the charge, often without telling the borrower, during the course of the loan, so much so that the regulator said “enough” in 2007 and told lenders to justify their charges (a bit like unauthorised overdraft charges).

As we’ve said already, charging fees is one way to keep the headline rate of a mortgage down. If you’re comparing like with like it shouldn’t be too hard to work out what’s the best deal for you is to help saving money. But not all lenders charge all of the fees, so you might have to get your calculator out to work out whether it’s better to pay a higher headline rate and make up for that with lower fees. You’ll also have to have a stab at how likely you are to want to move your mortgage before it comes to the end of its term and see which lenders offer the best deals.

To sum up with a savings tip – don’t be dazzled by a low rate and ask tough questions about fees.

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