For the majority of us, mortgage’s are a burden we all must bear if we want to eventually own the home that we live in. For the average person, a mortgage lasts for 25 years, although this average is increasing all the time, and in the past 10 years, people choosing to take a mortgage for between 30-35 years has more than doubled. For many, they simply accept that they will have the mortgage for the amount of time they agreed, they pay just the minimum amount required month after month and forget about it for the most part. The problem with this approach is, by not actively managing your mortgage, and by just paying the minimum amount for the full term, you will find after a short period of time that your interest rate increases, meaning your monthly payments increase, and the real kicker is… you will find yourself paying a third of the value of the house in interest alone.
Here is an example: (I’ll use round numbers just to make it easier)
Let’s say you want to purchase a house for £300,000, and you put down a £50K deposit which is around 17% of the purchase price. This means your LTV, Loan To Value, would be 83%. The remaining £250,000 would be taken as a mortgage from the bank, who offer you a 3% interest rate to pay it back over 25 years. As the graph below shows, your payments would be £1186 a month, which are made up of both capital and interest, and assuming you make those payments for the 25-year term, you would end up paying back to the bank £355,658 in total. Of that total figure, £105,658 of it is interest, which is more than a third of the property’s value.
According to a study conducted by L&C Mortgage’s, approximately 36% of all UK mortgage’s are currently on a Standard Variable Rate, SVR for short, meaning they have let their fixed interest deal expire and have moved to the bank’s ‘Standard Rate’. This SVR percentage is typically much higher, around the 4% mark, meaning anyone who is sat on this is over-paying every month. If we take the 3% example above, but increase the interest rate to 4%, what you get is the graph below.
As you can see, the monthly payment has increased to £1320, and the total you will pay back to the bank has increased by more than £40K to £395,878. This shows just how powerful an extra 1% can be, and also how detrimental it can be in your goal of eventually paying off the mortgage.
If you think paying this amount of interest is crazy, then your absolutely right! But what can you do about it?
The answer is, you can re-mortgage, otherwise known as Mortgage Refinancing.
When you first take out your mortgage, it will be on a short term deal, typically 2-3 years. What you must not do is let that deal expire. BEFORE the deal ends, you need to start searching around and start the process of Mortgage Refinancing. This is a very similar process to comparing car insurance, your checking with other companies to see who will give you the best deal. In this case, you’re checking all the other banks to compare mortgage interest rates, to find out if they will give you a better deal than what you currently have with the bank that you currently hold your mortgage with. Similar to car insurance, you can complete these checks yourself with relative ease. Some people like to use a mortgage broker which is somebody who will complete the checks on your behalf, but beware that some will charge a fee, so make sure to enquire about fees upfront before using their services.
You may be thinking, why would another bank offer me a better deal? Well, over the 2-3 years that you have had your current deal, you have been making payments to pay off the mortgage, reducing the amount you owe to the bank. This will mean your LTV, Loan-to-Value has decreased, which is one of the key things bank’s look at when determining the interest rate they will offer you. Therefore, by the time you come to refinance your mortgage, you should be able to get at least the same interest rate or better. In the case of the latter, when you can get yourself a lower interest rate, the effect this can have on the overall total to pay back to the bank can be INCREDIBLE.
Let’s take the first example from above, where you started with a £250,000 mortgage at 3% over 25 years, with monthly payments set at £1186 and a total to pay back £355,658.
If you could refinance this mortgage down to 2%, the monthly payments would fall to £1060, immediately saving you £126 a month. The total to pay back falls to £317,891, meaning you would save yourself a WHOPPING £37,767 in interest.
THIS IS THE MAGIC OF MORTGAGE REFINANCING.
The beauty of this is ANYONE can do it!
Anyone who currently has a mortgage can re-mortgage their home, and with a relatively small amount of effort involved, the impact refinancing can have not only on your mortgage but on your overall financial situation, cannot be underestimated.
Don’t forget, this is NOT a one time only thing. Mortgage deals typically only last between 2-3 years, therefore you should be looking to repeat the process of refinancing many many times over the course of the mortgage term.
Do not be that someone who lets their mortgage deal expire and transfer over to a Standard Variable Rate. Be the one that actively manages their mortgage and gets the VERY BEST deal available to them. If your reading this right now and you are not sure what’s happening with your mortgage, NOW is the time to do something about it. Don’t let your mortgage control you, get in the driving seat and take control of IT.
The savings to be made are huge, and with 36% of all UK mortgage’s currently sat on an SVR, there is a MASSIVE amount of people out there who could be cashing in right now.
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