Friday, 29 June 2012

Frugal Friday...

Yay! I've just made an extra payment to the mortgage - what a great feeling! This was in addition to our regular monthly overpayment, and it was made using "Money we didn't expect to have" - in this case a tax rebate, we work on the basis that if we didn't have it in the first place, we won't miss it if it goes against the mortgage!

To give you an idea of the benefits - we took the mortgage out on this flat in 2003, expecting to be paying it off until 2028. it was the standard 25 year term that most people end up with, and at that stage, the idea of overpaying hadn't really occurred to us...thankfully, in 2008, we "saw the light" and started paying whatever extra we could manage. Last year the time came to look at a new deal - our fixed rate product was nearing expiry, and as we were luckily in the small minority of Northern Rock mortgage customers to be taken over to the "good" bank when they split from what is now known as NRAM, we had options to choose from. We ended up choosing a 5 year fix, but, better than that, with the drop in interest rates, we were able to reduce the mortgage term by a full 5 years, whilst leaving the basic payments at the same level. Of course, we continued to overpay as well - the reason for leaving the basic payment at that level rather than increasing it was a "safety net" really - so long as we were still paying more each month, it made precious little difference what the amount we were *supposed* to be paying, was! So, now we have a mortgage which is scheduled to end in 2023 - 11 years from now. In fact, my spreadsheet tells me that so long as we maintain our overpayments at the level they are at currently, we are on target to make our final payment in September 2018 - just 15 years after starting on the path to home-ownership, and a slightly scary six years from now. Needless to say, we're still trying to knock a bit more off that, too! not only will we save ourselves 10 years of being tied to a large chunk of our income going out to the bank every month, but we will also, over that time, have saved ourselves a positive fortune in interest too (I have been told that at the point where we are now, every £10 we overpay saves us a whopping £3 in interest!).

Another big advantage of overpaying is that it gives you more options for better, and cheaper products when you come to change deals. The more you pay, the less capital you still owe, meaning that the LTV (Loan-to-Value) on your property becomes more favourable - once you get to the stage of having 75% LTV (ie you have already paid for at least 25% of the value of the property) lenders are falling over themselves to offer you deals, in our experience.  In four years time when our current fixed-rate ends, we will almost certainly go for an off-set deal - where your savings are used to offset the interest on the capital balance outstanding on the mortgage. The days of trackers being a winner are, in my opinion, over - the banks all learnt a stuff lesson when interest rates plummeted, and as a result there won't be tracker deals with the rate set 1% above base rate again for a very, very long time. The fixed rate was the one for us as although we were going to end up paying slightly more interest than on some other deals, we wanted the stability of knowing precisely what our monthly payment would be for a long enough period of time that when the deal ended we would have a small enough balance left that it could be hammered away at fairly fast. So far that appears to be going to plan...

If you're not already overpaying then why not give it a go? You will need to check the terms and conditions of your mortgage product, but most allow some form of overpayment. Ours stipulates that you can overpay no more than 10% of the capital balance in any one year, others have a fixed maximum sum you can pay, and there are some with no restrictions at all. Watch out for getting charged a fee for extra payments too - if this would affect you then it's still worth doing, but you will be best to use a savings account to put your overpayment money into and then pay a big lump off in one go at the end of the year, say - this way you only pay a single fee. For those of you with Northern Rock Plc - you can pay by cheque through a branch, or with a card over the telephone. Or of course you can simply call them and let them know that you would like to increase the amount you pay each month. All you need to do then is sit and watch that balance falling!


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