Recently we have been asked the following question: “We need to remortgage in a few months and wonder if it’s best to lower the amount we need to borrow?”
Q: We are looking to move up the housing ladder and have managed to save £60,000. However, we are struggling to find a house we like so it may be another year or two before we move. The issue is that we are coming out of our five-year fixed rate on our current mortgage in April and all the numbers suggest that it would be better to remortgage than stay on the lender’s standard rate. Is it best to use some of our savings (maybe £20,000-£30,000) to lower our remortgage or keep the money until we amend our mortgage for the new house?
I am just confused if lowering our current mortgage is the same as having more equity for our new house. My gut says lowering the current mortgage is best overall with the reduction in debt and interest paid, but I am worried I am mixing it up and all the other advice out there doesn’t seem to cover this area.e up some extra cash and move to a more manageable-sized home.
A: With interest rates paid on savings as pitifully low as they are, putting savings towards overpaying a mortgage makes perfect sense – but only if you can do so without paying a penalty. And then only if you don’t have any other more expensive debts such as an outstanding balance on a credit card. If you do, it makes more sense to pay off these debts before reducing the amount of your mortgage.
If, however, a mortgage is your only loan, it is worth investigating how much you are allowed to pay off without an early repayment charge. With a lot of variable-rate deals, you will be charged a fee if you make overpayments in the first two to three years of having the mortgage although several lenders – such as Coventry building society, First Direct and Nationwide – have no early repayment charges on their variable-rate deals. However, you will invariably find that overpayments on fixed-rate mortgages will trigger a fee if made within the fixed-rate period. But there may not be a fee if your lender allows you to overpay a certain amount each year – typically no more than 10% of the original loan amount or outstanding balance but the limit can also be a percentage of the monthly repayment.
Once the fixed-rate period comes to an end, the threat of an early repayment charge may also disappear but lenders vary so you need to check the terms of your mortgage carefully. Assuming you can overpay without paying a fee, it it would seem sensible to make the overpayment as you remortgage. That way, it may mean that you have access to better mortgage deals available to people who need to borrow less than 75% or 65% of the value of their property.
Assuming you can pay off £20,000 to £30,000 – while wisely keeping half your savings back for emergencies – tying up a proportion of your cash in property will both cut your costs and increase the equity in your current home. When you come to sell your home, less of the sale proceeds will be needed to pay off your current mortgage and more will be available to put towards your next home.
Source: The Guardian