How to Save on Your Mortgage as the Cost of Living Increases
Written on 2 August 2022 by
As living costs and mortgage rates continue to increase, not reviewing your highest monthly outgoing could prove extremely costly, especially in the long run.
For most people, their mortgage payment is their highest monthly outgoing. It makes sense then, to learn the ways in which you can manage your mortgage to save you interest and money overall – in addition to securing the best rate for your circumstances.
We go through things like product fees, remortgage, EPC rating and more in this blog post.
For information specifically on how to find the best remortgage rates and deals see our related article.
Whether you’re purchasing a new property or looking at a remortgage, you’re likely to encounter product fees or lender fees in your search. Paying a product fee can be advantageous as it can allow you to access a better rate, which will result in lower monthly payments and an overall saving over the term of the mortgage.
But, knowing whether it’s better for your situation to pay the product fee upfront or add it to the mortgage is definitely a good idea.
For a purchase, usually adding the fee to the loan will add more security than if you pay upfront. If you pay upfront and the property falls through, then you may not get a refund from the lender, or they may take their time in returning it to you. If you add the fee to the loan and the property falls through, then you won’t lose any funds. You can also avoid paying interest on the product fee by making an overpayment upon completion.
If you’re remortgaging, you can pay the product fee upfront and avoid paying interest, alternatively by adding the product fee to the loan you’ll benefit from getting a lower rate compared with not paying a fee but you’ll pay interest on the fee amount.
These options are definitely worth considering before applying for your mortgage to ensure you choose what’s right for you.
Each year fixed rate products allow you to make overpayments of up to 10% of the outstanding balance so you can pay off your mortgage quicker. You can typically do this by increasing your monthly direct debit or make lump sum payments. Many homeowners are currently on fixed rates lower than the rates on the market today. Therefore, when it becomes time to remortgage, you’re likely going to be moving onto a higher rate regardless of the LTV (loan-to-value) of your property. Utilising your allowance while on a low rate can be a more cost-effective way of significantly reducing your mortgage balance than making overpayments when the percentage is higher, because the rate reflects the cost of borrowing per £. You can calculate the impact of mortgage overpayments using our free calculator.
By increasing the term of your mortgage, you can lower your monthly payments and reduce your monthly outgoings. However, doing this also means there will be an increase in the overall cost of borrowing as you’ll be paying interest on a more slowly reducing mortgage amount for a longer period of time. Lower monthly repayments might be useful as a short term cost-cutting solution, but you want to ensure that you review the term each time your fixed rate comes to an end. Although you can extend the term during a purchase or a remortgage, this option is often particularly favoured by first-time buyers as they typically have 40+ years before retirement – which means they have more time to increase their earning potential and change to a different deal later on. It may not be possible for those nearing the end of their working career to extend their term, or they may have to look at alternative later life lending term options – e.g. RIO (retirement interest-only).
Energy performance ratings are based on the energy efficiency of your home. The EPC (Energy Performance Certificate) lasts for 10 years. When a house goes on the market or is let it needs to have a valid EPC rating.
As most homeowners will have work done on the property during the period in which they own it, many will find that the EPC has improved by the time it comes to sell. An improved EPC rating can add value to the property, meaning you can sell it for more and improve the LTV on your new mortgage, thereby accessing lower mortgage rates. If you’ve had work done on your property, it’s worth finding out its latest EPC rating.
A better EPC rating could also help you access better rates on a remortgage as lenders are keen to lend to homes that are an EPC C or above. Therefore it’s worth getting a new EPC before you start the remortgage process.
When you’re in a fixed rate and looking for additional borrowing your first point of call will be to your existing lender to see if they can lend you the additional amount you require; this is known as a further advance. If they can, great. But if they can’t, you can look to remortgage for more money. Historically, remortgaging would have been a great option as rates had been steadily decreasing for the last few years. However, now we’re starting to see rates rise again, homeowners are naturally concerned about switching from their current low rate to a higher rate as well as paying an early repayment charge for the privilege.
This is when a second charge might prove to be the better option. A second charge sits behind the first charge, which means you can keep your current rate in place and not pay any ERCs (early repayment charges). A second charge will allow you to raise the additional funds – at a higher rate. This can be cheaper than remortgaging and taking out the outstanding loan amount and the additional borrowing on a higher rate because this way, you can keep your existing fixed rate on the current loan amount, have only the additional borrowing on a higher rate and avoid paying any ERCs.
Furthermore, if you raise a second charge for home improvements you may even find that the property value increases after the work has been carried out, which will give you access to lower LTV products and better rates when it’s time to remortgage both charges onto a new deal.
Find out more with our guide to second charge mortgages.
Remortgaging is still a great option in the right circumstances. For example, if you have 6 months or so left on your remortgage – and you’re conscious you don’t want to pay any ERCs to switch to a new deal, you can fix a deal 6 months in advance with most lenders so that you’ll go straight onto your new rate as soon as your current fix period ends. If rates were to continue to decrease in those 6 months then you could look at switching to a new, lower rate in that time with the lender. If rates were to continue increasing in those 6 months then you will have secured a lower rate early on. A win either way.
We have also started to see lenders increase the time in which you can start arranging a product transfer from 3 months to 6. A product transfer allows you to stay with the existing lender and switch over easily without having to go through a full mortgage application.
Avoiding Costly Chain Breaks
There are few different lending options that can help you avoid breaking the property chain.
Current market conditions and people’s fear of missing out on great properties has resulted in regulated bridging increases over the last year. Once upon a time, you may never have considered bridging, but now – due to how quickly it can be arranged – many buyers who want to avoid missing out on their dream property actually recognise bridging as a great first option.
Bridging can be a short-term option to raise funds on your property but it can also be quite daunting as you’re limited to a 12 month term. It’s best to speak to an adviser about bridging finance. One of our advisers can walk you through how this sometimes complex product works and explain everything you need to know.
Let to Buy
Let to buy involves renting out the home you currently live in and putting the equity accumulated towards a mortgage deposit on a home elsewhere. This is a simultaneous completion and usually involves 2 different mortgages (a buy-to-let and a residential) with 2 different lenders.
Your current residential mortgage will change to a buy-to-let mortgage at up to 75% LTV. The buy-to-let mortgage funds will clear the current residential mortgage on the property and the remaining funds will be put towards the mortgage deposit of the onward purchase.
The new residential lender on the onward purchase property will use the surplus funds from the let to buy application as your deposit contribution - plus anything else you have chosen to contribute - and will then release the remaining funds to complete on the transaction.
The benefits of let to buy are that you can use the equity you have in your existing property as a deposit towards your new home, while at the same time converting the existing property to a buy-to-let on which you can earn rental income.
A let to buy also allows you to avoid the costs of a bridge and it gives you more options on how and when you want to sell your existing property.
The let to buy mortgage is based on the expected rental you would achieve rather than your personal income.
Remortgaging vs Product Transfer
Historically, clients would have faced different rates with the same lender when it came to the same product, much like with insurance products in the past where being a new client would have given you access to a better rate. Times have changed since then and that isn’t often the case anymore, with lenders now offering both new clients taking out a new mortgage and existing clients applying for a product transfer access to the same rate.
This may give you the impression that you’re getting a good deal and that may well be in some cases. But, taking the time to look at options on the market could pay dividends especially over the term of the loan. By reviewing each time you come to a milestone/end of a fixed rate, you can assess your options and find the most cost-effective solution – whether this be staying with the same lender, moving to a cheaper rate with a new lender, reducing the mortgage term or something else.
The easiest way to ensure you secure the best option for you is to contact John Charcol and speak to one of our expert mortgage advisers. Our team will help you find the right deal for your circumstances that will save you the most money. Contact us on 0330 433 2927.
Category: Nick Mendes