Your mortgage - a short-term desire

There are not many things in life that people bend over backwards to get, then once they have it spend the next tens of years trying to rid themselves of it again - but a mortgage is definitely one of them.

The madness of a mortgage

For some reason, 25 years has become a key length of time when it comes to mortgages. Traditionally, this was the period over which lenders expected borrowers to repay their loan, so affordability was calculated accordingly.

For example, if you have a £200,000 repayment mortgage priced at 6.5%, the lender will ask for £1,350.41 for each month over 25 years, which amounts to 300 payments. Though you probably dont want to know, the final figure you will pay back under these circumstances is an eye-watering £405,124.30 - more than double what you borrowed.

But these days, borrowers are not tied down to this unfavourable situation and the arbitrary nature of a 25-year term is increasingly being recognised. As a homeowner, you are now in control of your mortgage debt and can choose to pay it off more quickly than a quarter of a century. With some mortgage deals in fact, you can pay it off as soon as you are able. So how do you go about it?

Could you save years of interest by overpaying your mortgage?

Chip, chip, chip away

The majority of lenders now allow mortgage customers to make overpayments at no cost on a monthly or yearly basis. For example, Nationwide permits borrowers to overpay by an extra £500 each month, regardless of your mortgage balance, while the Cheshire Building Society sets down a fixed limit of £5,000 per year.

Other lenders work in percentage terms. The Yorkshire Building Society, for example, allows borrowers an overpayment facility of 10% of the original balance each year, while with Stroud & Swindon, borrowers can repay up to 25% of their mortgage during the period in which early redemption charges (ERCs) apply.

Using this increasingly-standard facility offered by lenders and overpaying by just £100 a month on a £200,000 mortgage priced at 6.5%, you would repay a more respectable total of £368,915.78 back to the lender. That means an interest saving of £36,208.52 and being mortgage-free 3.8 years ahead of 'schedule'.

Sure about your mortgage choices? If you're not and you need someone to talk to, why not call us for independent, unbiased mortgage advice.

Pay in your bonus

In addition to lenders' blanket policies on overpayments, borrowers can look for specific deals that allow you to pour even more money into your mortgage at no penalty such as large annual bonuses or an inheritance. The best example of this type of mortgage is a lifetime tracker which is offered by lenders like the Woolwich, C&G and Hinkley & Rugby Building Society.

A lifetime tracker is linked to the Bank of England base rate so its rate will be variable for the course of the term. But in return the borrower receives total flexibility and ERCs will not be incurred even if you redeem the entire loan. The Woolwich is currently offering a rate of base plus 0.27% on its lifetime tracker deal (current pay rate 6.02%) with a 60% Loan to Value. For borrowers with a 20% deposit, the rate is higher at base plus 0.37%, making a current pay rate of 6.12%.

With this facility you can pour any amount of annual bonus into your mortgage at no cost. For example, if you put a lump sum of £5,000 into your £200,000 mortgage (payable at 6.5%) you would save around £6,380 in interest and be able to redeem the loan 0.7 years early. Paying a £20,000 lump sum into the same £200,000 loan in year 12 of the mortgage term would save you considerably bigger £22,713.10 in interest and mean paying of your mortgage 2.6 years early.

29 October 2007 © Moneyextra.com

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