How to be Mortgage Free

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Cutting the lifetime of your mortgage doesn't have to mean hatching a complicated grand plan to get rich quick - there are easier ways.

By Sarah Jagger

The Basics

You've just come to the end of the discounted or fixed-rate period on your mortgage and now you find yourself back on your lender's standard variable rate (SVR). It's time to consider what to do next as in some cases it's not cost-effective to pay the standard variable rate.

Why Bother?

• The average mortgage swallows up 25% of our monthly income.
• You don't want to be paying off the mortgage in your retirement. The average first-time mortgagee is in their late thirties.
• You can save thousands!

The Two-Pronged Attack

You can reduce your mortgage term by finding the lowest rate of interest around (so your monthly payments are low) and then by overpaying whenever you can.

Crunch Down The Interest

'Make sure you shop around and get the lowest rate you can,' says Andrew Hagger, of Moneynet. 'For example, on a £100,000 mortgage over 25 years at a standard variable rate of 4.64%, your repayments would be £564. But if you switched to a cheaper rate of 3.29%, your monthly repayments would fall to £489 per month.'

If you can afford to make additional overpayments of £100 per month on your mortgage it would mean that your home loan would be repaid a full six years earlier and save you an eye-watering £12,116 in interest costs in the process (assuming your rate remains at 3.29% for the term of your mortgage).

Overpay

The vast majority of mortgages allow you to overpay, typically, 10% of the capital every year without penalty. 'But remember that if you exceed the annual allowance, you will be charged a fee,' says Julia Harris, mortgage analyst at Moneyfacts.co.uk.

Flexible Mortgages

How Do Overpayments Work?

The overpayment facility on these can be used whenever your finances allow - either by making regular overpayments, or capital repayments from irregular income such as an annual bonus or commission payment.

And because fully flexible mortgages 'hold' the overpayments separately, capital repayments made could be redrawn for emergencies. If you're really financially organised, you could take it further with an offset or current account mortgage. With these, your savings are used to reduce the amount of interest you have to pay, so the mortgage will be repaid quicker.

If you're planning on overpaying, consider:

• Whether your lender will charge you a penalty.
• How your lender calculates interest - annually or daily? If it's annually, then you could be waiting a while to reap the benefits.
• If you are paying off a lump sum, don't be tempted to reduce your monthly repayments, by keeping your repayments at the current level, this will save interest and help you pay off the mortgage early.

Get Clever

Plan ahead by about four months if you want to remortgage, so you can move easily between your existing mortgage and the new deal.

Compare deals at moneynet.co.uk, moneyfacts.co.uk or moneysupermarket.com; or via a genuinely independent financial adviser (find one at www.unbiased.co.uk).

Take account of the lending fee, which can easily be as much as £1,000, whenever you are comparing mortgages from different lenders - don't just focus on the interest rate. Ask your lender or mortgage broker to provide you with the total cost of the mortgage, as this will make it easier to compare products.

Why Not Just Reduce The Term Of The Mortgage?

If you're thinking, 'Only 25 years? I can do it in 15!', slow down, tiger! It may be worth thinking about if your current income would allow you to step up your payments and cut the term, and it will certainly reduce the overall amount you pay, but it offers no flexibility. Independent financial adviser Karen Ritchie says, 'We don't recommend that clients decrease the term. If you do, you are committed to always overpaying, and you may have to pay an initial administration fee as well.'