Interest rates on savings are currently so low that your money is earning very little. It probably makes sense to pay as much as you can afford every month to reduce your mortgage debt where the interest will be higher. With the ‘right’ flexible mortgage you can probably borrow back the money you’ve overpaid if and when you need to.

What is a Flexible Mortgage?

• The term ‘flexible’ has become rather overused by the mortgage industry. Some deals are only fairly flexible but others give you far less flexibility than the name suggests
• Flexible mortgages let you overpay as a one-off payment or by increasing the amount you pay each month.
• You should be able to make reduced mortgage payments when you have overpaid on your loan first. So in good months you pay more than the minimum required by your mortgage agreement but in tough months you can pay less as long as you do not owe more than if you had always maintained normal repayments.
• More formal ‘holiday’ periods are possible in flexible mortgage agreements.

How flexible is the Mortgage Lender?

• Flexible mortgages vary as there is no legal definition or common standard
• Talk to your lender and solicitor so you understand from the outset.
• You must also read the small print to take advantage of the flexibility on offer.
• Smaller building societies may deal with individuals with flexibility but may also be constrained by rules.

Flexible Mortgage Issues

• If you fall into arrears you may loose the rights to flexibility so take care.
• Check that any holiday or reduced payments will not be entered on your credit score record.
• Do not over pay for flexibility you do not need. Check your interest rate is competitive, some flexible deals attract a premium rate of interest.
• Flexibility is a long term issue and you should be thinking about the whole life of your mortgage. Better to get good flexibility on key issues than have quick flexible wins now in year one.
• The flexible mortgage calculator on this link can show the benefits of early repayments
• An offset mortgage is one special type of flexible mortgage.

If you are able to pay off your mortgage early, you can save yourself significant sums on the total cost of the mortgage.

(see: benefits of paying off mortgage early)

• assuming an average interest rate of 7%  on a £150,000 mortgage.

Paying in 15 years rather than 30 years, saves a total of over £106,000 in the total interest bill

Early Repayment Through Circumstances

• The most common early repayment arises when the borrower moves home. The old mortgage is repaid and a new one may be negotiated in it’s place.
• Windfalls are unfortunately all too rare and even if you win the lottery or are left a large sum of cash it is not always best to repay your mortgage.
• Divorce, death or bankruptcy can lead to the termination of a mortgage. Specific terms for paying off your mortgage in these circumstances will depend on the money available and the facility to negotiate.

Early Repayment By Borrowing Less

• Start with the lowest amount of mortgage you can. Less now means less repayments later. Do not add soft furnishings and extras to your mortgage but try to pay for them out of revenue.
• Similarly do not add mortgage fees and legal costs to the overall mortgage. Remember the lenders job is to make money out of you and that can be done by lending you more for longer.
• Go for the lowest net interest rate you can. A high interest rate can increase your overall mortgage term by several years.
• Opt for the biggest deposit you can afford as this may reduce the rate of interest you are charged.

Early Repayment By Advancing Payments

• Ensure your mortgage has no penalties for early repayment but includes the facility to over-pay when you have the cash.
• In many situations an offset mortgage will reduce your repayment period often by years. You are credited with interest on your current (checking) account and other deposits before the lender calculates the mortgage interest to add to your total borrowing.
• If given the chance to reduce monthly repayments (say interest rates have fallen) do not take up the offer. Keep your payments at the old or better still an increase level for quicker repayment of the capital.
• If you have budget savings e.g lower insurance costs then use the money to repay a bit more on your mortgage.
• Consider any lump sum you have as a possible means of to pay off your mortgage early.

Best Types of Mortgage For Early Repayment

• An offset mortgage / Current account mortgage automatically uses money from your bank account to reduce your mortgage total. This means you can concentrate on saving money and the bank will automatically reduce your mortgage total.
• Look for flexible mortgages which don’t penalise early repayment.

Saving Money To Pay Off Your Mortgage Early

• Consider holding back on other investments such as pension and concentrating on repaying your mortgage. Once your mortgage is paid off early, you can put greater resources into pensions and savings.
• See these tips for saving money in the home
• Reduce unnecessary spending – see: 7 Tips for Reducing overspending

For more tips on Reducing Your Mortgage Quicker read Housing.org

The reasons for many of the current mortgage refusals include the lenders own problems, a perception of your status problems or a property related problem.
Above all you should read the messages and do something about what is hidden in the refusal.

Property related Problem

• The structural survey is for your benefit but the interpretation is often left to the prospective lender. Their interpretation will be risk averse.
• If the property is badly constructed perhaps from dangerous materials or with poor technique such as a wrongly pitched roof the lender may adjust the loan value down aggressively. They are saying BUYER BEWARE so take the hint!
• The lender will know about problems and blights in a tight area such as flooding or subsidence risk and adjust the loan accordingly. Whilst they may be reluctant to tell you why for fear of being sued (what a litigious nation we have become)
• Simple over valuation of a property can derail a mortgage.
• Remember there are other properties and they may be more suitable or less risky for you so don’t shoot the messenger

Lender related Refusals

• You can’t do a lot if the lenders national policy is sent down to a local branch eg we don’t want to lend to people from a particular profession or for a type of property or our loan book is full.
• Lenders who run out of money do not like to admit that fact and try to continue business as usual! Until the crunch and you get knocked back.
• Your face or profile fails their internal IT test.
• Take you business elsewhere. The market is more lively than you may think!

Personal related Refusals

• You may have seen it coming with a poor credit score, low deposit, uncertain income or whatever. Try match your aspirations with the right sort of lender.
• Unexpected refusals should be explained. The explanation will allow you to study and correct the issues for your next attempt to get a loan.
• Outright refusals are unlikely to be reversed on appeal.
• Conditional refusals or approval on terrible terms may be subject to negotiation.

Common Reasons for Refusal

• Overdue or missing your current mortgage repayments.
• Becoming self-employed or changing job during loan negotiations.
• Reducing your credit score.
• Having too many outstanding loans and credit card debts.
• Making errors or omissions on the application forms and documentation.

See also Mortgage refusals in a changing market

Mortgage Types Based on Interest Charges

• Offset Mortgages are set up so that any money you have on deposit or in a current account with your mortgage lender is set against the sum you borrow before interest is calculated. The rates may be slightly higher but the capital sum attracting interest is generally lower.
• Interest Only Mortgages are as they say in the name. The capital is only repaid at the end of the mortgage. You need a clear plan on how the capital will be repaid before you can get an interest only mortgage. They fell out of favour over the last 5 years.
• Tracker Mortgages have an interest rate that moves or tracks a published base rate. A 3% over base will cost 3.5% when the base is 0.5% but 9% when base is 6%.
• Discounted rate deals are less common but there are short term reductions on the rate of interest you pay initially. The rate increases later to offset your earlier discount
• Fixed rate or Variable rate can apply to most forms of mortgage. In one the interest rate is fixed for a number of years or occasional the length of the mortgage. The variable interest rate can ‘track’ or be set on specific terms.

Mortgages for Special Circumstances

• Low Deposit deals generally cost more in interest charges and possibly fees. 5% deposits were common until recently but are now very hard to find
• No Fees Mortgages have the costs wrapped up into the capital sum being borrowed. You just borrow more to cover the costs or pay a higher interest rate to provide a profit for the lender who is standing the fees.
• Remortgages or second mortgages may cost more as the lenders risk is increased. The circumstance of each loan will dictate the basis of the mortgage.
• Buy to let mortgages to acquire a house with a view to rent out will require a good deposit and possibly a higher interest rate (this may be set against rental income for tax purposes.) There are specialist lenders for this market.
• First Time Buyer are set up to encourage home ownership. Government incentives are sometimes available and short term discounted rates may be on offer.
• Equity release schemes are designed to free up a capital sum for the owner that will be repaid on death.
• Self certified mortgages were common for the self employed until the FSA got worried about over statement of income leading to default. Special deals need to be done for those in business but without an obvious regular income.

Finance Blog Comments

• Mortgages are a complex business and we advocate care is taken.
• Too many products on the market can only confuse the borrower. The vast range of products has reduced since the ‘crash’ but the offers available are still hard to compare and contrast.
• We like the Kiss mortgages where the lenders have ‘kept it stupidly simple’. If in doubt get a full explanation from your potential lender.
• Fees can be a big part of the overall cost of a mortgage. This is especially true if you regularly change from one mortgage method to another.

Equity is Still the Name of the Game

• Optimise the amount of equity you are putting into the deal.
• Save and be able to show you are saving out of your regular monthly income.
• Beg for cash from relatives to boost your initial fund
• Defer major purchases.
• Keep other debts as low as possible. Credit card liabilities look like negative equity so pay them off.
• If you have other pressing repayments to make on a regular basis new lenders will find it harder to lend to you.

Administrative Organisation

• Check you are on the electoral role before applying for a mortgage. If you are not, it is a reason for your application to be rejected.
• Obtain a copy of your personal credit report, potential lenders certainly will. This way you can correct any factual errors and be prepared with explanations if necessary.
• Gather your documents like pay slips, tax returns and P60 as proof of income.
• Research any schemes of support that you think you want to rely on such as the government backed First Buy scheme.
• Over 50′s and mortgage release schemes will have to show proof of how the capital debt will be repaid. Get your plan ready to show how you expect to achieve this.

Organised Process

• Citzens advice bureau offer free advice on mortgages.
• Independent financial advisers or mortgage brokers may be needed to help in difficult and marginal cases.
• If you are in the Armed services or moving out of social housing and have an income below £60000 pa you may be entitled to some priority under government support schemes. Get the facts.
• Be ready to demonstrate you are not over extending yourself and can meet your obligations.

Mortgageguideuk.co.uk Quick Tips

• Safe regularly with the building society or bank that you want to borrow from. This builds trust and confidence.
• Get a face to face meeting with a senior mortgage adviser at your chosen lender. Be well prepared and seek an agreement in principle to your loan subject to the property valuation.
• Do not over extend your self, you can always trade up as the mortgage and housing markets improve.

House prices fell at the beginning and through of 2011 and only started to stabilise towards the end of the year. New build companies managed to survive trying market conditions by moving their mix of properties to larger more upmarket plots. Some builders were able to supplying social packages of new housing but more needs to be done.

What will Happen to House Prices in 2012?

• There are three scenarios. A healthy rise in prices starting in spring, a static market bumping along the bottom for most of the year or a further slump in prices.
• There are serious downside risks on prices that could slump 5-10%. Lending is still not freely available. The Euro may collapse and drag confidence and markets down still further. The economy may fall into further recession and unemployment, already set to rise could leap out of bounds.
• To sustain a price rise there needs to be an increase in fundable demand. Hefty inflation can take some of the inflated house values out of the market place but it will be slow to take effect and will not impact on 2012.
• Perhaps a static market in pricing terms is the best we can expect for 2012. Interest rates need to remain low and forbearance high to avoid a jump in negative equity and repossessions.

What will Happen to Mortgages in 2012?

• Wholesale money markets are struggling with the Euro. They are also seeking higher rates of return and interest rates will be higher in 2012. This is true even if Bank Rate remains at the current 0.5%.
• Marginal mortgages will continue to be harder to find. Self certification mortgages for example may be regulated out of existence.
• The interest rate trend is up – fixed term deals are now more expensive and progressively harder to find.
• Demand for mortgages will probably fall in reaction to the economy, funding costs and lack of activity in the housing market. This battening down of the hatches and a return to saving may provide a breathing space the housing and mortgage market needs to get back on an even keel.

Exceptions for 2012

• As with 2011 some areas will escape the downside of the general market. Premium properties in London were still strong as foreign investors bought property. The continuation of this effect will depend on the relative situation with the Euro countries and the flight of capital from unstable areas but sterling based property may survive.
• The Olympics and gentrification in some London areas like Whitechapel, and Elephant and Castle will create pockets of increasing prices.
• The split of retail banking from investment banking has the potential to create great change but it is likely to be delayed in implementation and take effect only slowly.

The Council of Mortgage Lenders (CML) reports today that the squeeze on borrowers and longer term arrears continue to harden. It seems the economic outlook looks increasingly uncertain despite David Cameron trying to boost the housing market.

Borrowers Position on Arrears

• For those already struggling to pay or with established arrears the first action must be to talk to your lender. Borrowers can become over extended for many reasons.
• Lenders are likely to vary and may take different views depending if your problems are long or short term.
• Depending on your payment history and your circumstances your lender might agree to:
• Reduce your payments for a set period
• Charge you interest only for a while if you’ve got a repayment mortgage
• Allow you to pay off the arrears gradually, alongside your usual payments
• Give you a ‘payment holiday’
• Extend your mortgage term or add your arrears to your mortgage
• Let you stay in your home while you try to sell the property and find somewhere else to live
• Suggest other assistance, such as one of the government schemes to help with mortgage difficulties

If you have other debts on top of your mortgage payment problem then read this on debts and not panicking and talk to an adviser.

You can be referred to the Mortgage Rescue Scheme by the Citizens Advice Bureau or Shelter, your mortgage lender or the courts. Your Local authority in England will be able to point you in the right direction.

Shelter offer a range of advice ‘If you’re struggling to pay, you need to act quickly, even if the problem is only temporary – as you could lose your home. Use Shelter’s directory to find face-to-face advice services in your area.’

More Government advice.

Lenders Perspective on Arrears

With firms under ever-intensive pressure to treat customers fairly whilst mitigating loss risks The Council of Mortgage Lenders have dedicated there forthcoming conference to looking at the arrears landscape, forbearance and emerging issues for managing properties in possession.

Topical sessions at the conference on 9th February 2012 in Manchester will cover

• The policy context for arrears and possessions
• Trends of arrears customers
• Lender forbearance
• Compliance
• Mental health training for collections staff

In 2011 a total of 27,500 properties have been taken into possession – fewer than in the equivalent period last year. There is still a stock of cases with significant arrears. According to CML 27,300 loans have arrears of more than 10% of the outstanding balance. This is still a dramatic improvement on the last two years. see Mortgage default rates

Impact of Arrears on Lenders

• Repossession, arrears and write-offs detract from current and future lending.
• If financial performance deteriorates due to arrears then confidence and the ability to raise new funds stalls.
• ‘Ongoing pressures remain and the economic backdrop represents a significant challenge to the recent improving trend in arrears.’CML November 2011
• Confidence is still the key issue from valuers, surveyors, vendors, purchasers and throughout the housing chain.

Benefits of Mortgage Interest Tax Relief

• It will help re-stimulate the housing market.
• It strongly endorses and supports long term saving.
• Buy to let relief is currently unfair and capable of manipulation. These changes would be an opportunity for a thorough overhaul.
• It will help those in negative equity and the badly squeezed middle classes.
• When interest rates increase it will help make ownership and repayments just that bit more affordable.
• The squeezed middle class will feel they are getting something from a government they helped to put into power.
• Future pensioners will have realised home ownership quicker than may otherwise be the case.
• Lenders will be able to assess credit risk a bit more favourably.

It will be a boost to the flagging finance industries.

• A stimulated housing market will help construction, the economy and ultimately the tax revenues.
• Extra disposable income will result in more home improvement expenditure and thus the economy.

The Old Scheme of Tax Relief

• Mortgage Interest Relief at Source, or MIRAS, was a scheme introduced in the United Kingdom in 1969.
• The aim was to encourage home ownership.
• Miras allowed borrowers tax relief for interest payments on their mortgage.
• Gordon Brown terminated the relief as he thought it had become a middle class perk.

A New Scheme of Tax Relief

• Abuses and unintended consequences need to be managed out of any new system from the outset.
• Buy to let and second homes should be excluded. Only the prime property should be available for relief.
• Only basic rate of taxation should be relived.
• All capital gains on property or development gains within a property should be taxable as they are realsied. This would be some form of payback.

Echoing Housing Market’s post Go for it George!

Sources

‘Mortgage interest tax relief is alive and well for investment landlords’ The Scotsman
‘Help towards some mortgage interest is payable as part of your benefit and is called Support for Mortgage Interest (SMI). You are likely to qualify for SMI if you are getting income support, jobseeker’s allowance, employment and support allowance or pension credit.’Mortgages.co.uk
Costings by the HRMC are available on pdf

Headline Benefits on Early Debt Repayment

• You own the property free and clear – it is a great feeling why the mortgage has gone.
• You no longer need to make regular repayments and have more disposable cash available for other things.
• No finance company is taking a lump out of you with interest or charges
• In an uncertain economic climate one uncertainty, housing, has been removed.
• You can pledge your property again if the need arises.
• Total interest payments will be lower and you wont suffer higher rates in the future.

A Look at Interest Rates

• Predicting interest rate changes over the life of a mortgage is too hard for mere mortals.
• 99% of the life time of a mortgage, the rate you would earn on savings will be less than the rate you will pay on borrowings. The ‘turn’ is how banks and finance companies should be making a living.
• Interest calculated annually on the total outstanding before any repayments are credited is or was a way of unscrupulous finance companies to increase their returns at the borrowers expense. Even calculating on a monthly (not daily) basis will cost a borrower significant sums over the life of a mortgage.
• If you have the facility to repay a mortgage early then interest is a cost you do not have to pay!

A Look at Inflation and Opportunity Lost

• It is seductive to think you are repaying your current debt in 10, 20 or more years hence when inflation will have taken care of the currencies worth. Tell that to the Japanese who have suffered deflation and are repaying debts now with wages that are worth less than when the debt was incurred.
• Inflation is not the key to eroding your debt you also need wage inflation.
• Even with inflation and regular increases in average net incomes your personal situation may alter. There is a time of life when your income is at an optimum. For the majority that is not at the end of a mortgage but may be significantly earlier.
• Lost opportunity is what else you can be doing with your money. Saving, spending, donating or burying seem to be the alternatives. If it is someone else’s money, the mortgagors, then repaying seems to have some moral justification.
• A property ”free and clear is not a substitute for a pension. You need somewhere to live and a source of income in retirement. Property to let may be a good alternative to a pension.
• Investment is the alternative use for early mortgage repayment money. A successful stocks and shares portfolio ( sheltered from tax in an ISA wrapper) may perform better than using your money to repay the mortgage early but it may do the opposite and bomb!

Summary

To be contemplating the benefits of Early Mortgage Repayment is a nice problem to have – we should be so lucky.

‘Neither a borrower nor lender be’ except when you need somewhere to live. Makes me think positively about the investment route for spare cash. Over a 30 year period capital growth in mixed equities I would hope will beat mortgage interest paid out. (This presupposes low investment costs and not paying too much in charges to finance companies for fund management.)

Personal Loans That Reduce Mortgage Costs

• Some mortgages cost more than a cheap personal loan.
• Mortgage rates are often sensitive to the loan to value percentage(LTV). If you can take out a personal loan of say 10% of the property value you then need a lower mortgage. This should put you on a lower interest rate either fixed or variable. The real trick is to aggregate the cost of a personal loan and a mortgage and see what the total cost effect as a percentage. Include all set up charges and fees in the calculation.
• Personal loans are most frequently on a fixed percentage interest rate through out the term. With current competition amongst lenders, loans can he found that cost circa 6%.

Considerations of Mixing Personal Loans and Mortgages to Reduce Cost

• Personal loans will increase monthly costs as they are repaid over a shorter period. More capital is repaid each month.
• As personal loans are shorter term the total interest will be lower than if the loan is spread over the full mortgage period. This saving can be very substantial.
• Many mortgage lenders wont worry about you using a personal loan as part of a deposit but you need to tell it how it is and not hide the fact.
• Be sure you can fund the monthly payments on the mixed basis you establish.
• You need a good credit rating to get the best low personal loan interest rate.
• Check the thresholds for loans. A £9,999 loan may be lower interest % than a £10,000 loan. A mortgage with LTV of 80% may be higher than a 79% mortgage. These terms vary by lender.

Comment

• The total cost of buying a home may be a significant factor in how you fund the purchase.
• Often short term issues of affordable repayments mean you need to spread the cost over a long period. If this is so a personal loan approach may not give you what you need.
• Others take the view that making repayment later in the mortgage is preferable as inflation (in income) will have diluted the personal impact.