If you are somebody who likes to take care of your finances, here’s a few ways some people can potentially save thousands of pounds by planning ahead.
As most people know, mortgage lenders offer their products based on loan-to-value percentages. These percentages come in 5% intervals, getting better as you go down starting at 95%, then 90% then 85% down to 60% and occasionally 50%. Because of this, you want to try and get your loan-to-value as low as possible each time you remortgage, however because the interest rates come in 5% intervals, there is no advantage in the interest rate of owing say 87% over owing 90%, or 71% over 75%.
There are a few ways you can take advantage of these rules. Firstly, when you come to remortgage, if you have the cash available to take you into a lower loan-to-value bracket, then consider paying it down to fit. Even if you are giving up a really good interest rate on your savings, a slight reduction in your mortgage interest rate could save you thousands of pounds due to the size of the debt.
If you don’t have any cash available to get the loan down, ask yourself if you can get the value up. You need to be careful here not to be unrealistic, but if you think your house is worth around say £110,000 and a value of £115,000 would get you into the better mortgage deals, maybe give it a try. Always speak to an adviser about this before attempting to play with the figures in this way. It can be a gamble, and sometimes a gamble not worth taking for various reasons.
So, these two ideas are for when you are at the point of remortgaging, but why wait until then to address the issue. When you take out a new mortgage, you will usually have something like a tracker rate or a fixed rate for 2, 3, 5 or 10 years. So you already know in advance when you are going to be looking at taking out a new deal, so we should plan for it.
For example, you buy your first home for £150,000 on a 95% loan to value mortgage deal, by borrowing £142,500 on a 3 year fixed rate of 4.99% over 20 years. Most mortgage brokers will give you a table which shows how much you will owe over the years, and after three years in this example you would owe £129,000. House prices may move up or down, but if you assume that they stay the same then you will owe 86% of £150,000. By saving £1,500 over the three years ready to pay down your mortgage balance, you can get down to 85% and make yourself eligible for better mortgage deals.
This is a very basic example and you need to have a look at your own individual circumstances to see if this type of planning is possible. There are many things that can make the calculations more difficult, such as house price movements or interest rate changes if you are on a variable rate. It is a plan that doesn’t always work out, but there is no harm in trying and failing, because at worst it has given you an incentive to save some money.
Jason Hinde DipPFS, Cert SMP
12th October 2015
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