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Pay down your debt with a super-cheap mortgage
| How would you like to pay off your mortgage years ahead of term and save thousands of pounds in interest charges? Sounds tempting doesn't it? And with interest rates currently at a record low, now is a good time to pay down your debt by overpaying your mortgage each month. Plus the lower your mortgage rate is in the first place, the lower your monthly repayments, freeing up more spare cash to overpay. Those on variable mortgages, like a tracker or discounted rate, have seen their monthly repayments plunge since the Bank of England Base Rate fell to 0.5 per cent in March 2009. If that's the case, all you need to do is maintain your previous higher monthly repayments and overpay the difference. But how does paying more than your lender asks for save you money? Shave years off your term When you overpay, it comes straight off your mortgage balance and, in turn, you will be charged less interest because your debt is smaller. Next month, a bigger chunk of your usual monthly repayment can go towards paying off your debt, because less is now needed for the lender's interest. Overpay again and your debt reduces even more, you incur less interest, and over the long term the cumulative effect of this can be enormous. For example, if you overpay by £50 a month on a £100,000 mortgage with an interest rate of 3.5 per cent, you will reduce your mortgage term by three-and-a-half years, as well as saving a massive £14,500 in unpaid interest. Double your overpayment to £100 a month and you'll save over £25,000, chopping almost six years off your term. Plus, by paying down your balance now, more competitive mortgages will be open to you when you decide to remortgage, because lenders reserve their best rates for those who have the most equity in their home. Take a tracker Tracker and discounted variable deals are currently significantly cheaper than fixed rate mortgages, making them perfect for those who want to overpay. After all, the lower your official monthly repayments, the more you can afford to pay on top. Of course, with any variable mortgage there is a risk that your repayments will increase if interest rates rise, and you should factor this into any mortgage decision you make. But if you want to make the most of low rates now by switching to a cheap variable deal, you could take advantage of HSBC's two-year discounted mortgage at 1.99 per cent which comes with a fee of £999, as long as you have 40 per cent equity in your home. Those with 35 per cent equity can access First-Direct's 2.39 per cent term tracker with a modest £499 fee. It comes with no early repayment charges, so you are free to switch at any time if interest rates rocket and you want to lock into a fix. Britannia Building Society's three-year tracker at 2.49 per cent is a best buy for those with 25 per cent equity in their home, and comes with a fee of £999. And if you have just 15 per cent upfront, Leek United's two-year discount at 2.95 per cent comes with a tiny £195 fee and £250 cashback. Many lenders will allow you to overpay 10 per cent of your balance each year without penalty, and Lloyds Banking Group recently doubled its overpayment limit to 20 per cent for the next year across all its brands, including Lloyds TSB, Cheltenham & Gloucester and Halifax. Those with a fully flexible deal or an offset mortgage will probably be able to make unlimited overpayments every year. Reducing your mortgage balance while you can afford it makes perfect sense, puts you in a better position if you decide to switch your deal, and can slash your mortgage costs by thousands of pounds. |
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