May
18
With another cut in the base rate by the Bank of England and similar cuts in the mortgage rates by many of the most popular lenders, the majority of borrowers are still missing out on the main benefit these reductions bring . . . Shorter Term Mortgages.
According to a recent article in money.telegraph, not only do more than half of homeowners not know what interest rate they are paying, but 12% of those who knew what rate they were paying were paying a rate greater than 7 per cent, one that can easily be bettered.
Whilst some estimates put the number of mortgages which could be switched to cheaper rates at around the seven million mark, many of those who do switch to a cheaper rate fail to grab hold of the main benefit of doing so … clearing their mortgage debt sooner.
Take Joe and Josephine Public who have a five year old £100,000 repayment mortgage at a rate of 7.2%, costing them £720.94 a month. On switching to a flexible mortgage at 6.00%, costing £655.71 a month, they use the savings to eat out more regularly, go to the cinema more often and make more use of the local health club.
Unfortunately most people are like Joe and Josephine and use the opportunity of a lower monthly payment as an excuse to pay less to the mortgage company, and spend more on themselves. For them, and for those like them, this could prove a costly decision.
The vast majority of people still fall for the mantra chanted by lenders and mortgage salesmen alike, that “a mortgage lasts for 25 years”. Cobblers. The difference in monthly payments on a repayment mortgage lasting 20 years to one lasting 25 years is negligible. The extra few pounds is certainly worth it to remove the shackles of debt five years earlier. Lower interest rates present a similar opportunity to everyone with a mortgage, to remove those shackles - Permanently.
Let’s stick with Joe and Josephine. They have 20 years remaining on their £100,000 25 year repayment mortgage and have successfully moved to a flexible rate mortgage of 6.00% but instead are going to keep up the same monthly payment of £720.94. In so doing, if interest rates remained constant, they would knock 38 months off the remaining 20 years and save nearly £12,000 in interest.
Making the most of lower interest rates doesn’t just apply to those with repayment mortgages. Those who have been subjected to the stress-inducing letters concerning possible endowment policy shortfalls can switch all or part of their mortgage from interest-only to repayment.
Whilst the maths is such that a repayment mortgage means a higher monthly payment than that on a corresponding interest only mortgage, moving to a mortgage with a lower interest rate should enable you to cancel this out. And if you do not wish to remain under the spectre of an endowment shortfall this would appear the perfect solution.
What is more, if the endowment does not perform as badly as the doom-mongers would have you believe, then you will actually end up with cash in your pocket.
If you have an endowment mortgage, which worst case scenario would you prefer to have? One where your policy matures and you are left having to find £10,000 from somewhere to pay off your mortgage, or one where the worst thing that could happen is when the endowment policy matures it clears your outstanding, and somewhat reduced, mortgage?
When the Bank of England lowers the base rate, savings and lending rates fall across the board. Using the corresponding reduction in your monthly mortgage payment and “spending” the saving is not taking advantage of the lower rate.
The future of interest rates is uncertain. There is no guarantee what they will be one year from now, let alone what will happen to them in the next five, ten or twenty years. But whether they rise or fall, the more you owe the more interest you will have to pay. With interest rates currently falling, why fail to seize the opportunity which ensures that you not only have lower interest bills today . . . but much lower interest bills during all your tomorrows.
