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How to cut the cost of your mortgage in 2018

Planning ahead could help you bag a better mortgage deal

As resolutions go, being proactive with your mortgage might seem a bit dull. But a bit of planning could save you a pretty penny in 2018, especially if you’re coming to the end of your fixed term.

Here, we offer an overview of the mortgage market, and David Blake from Which? Mortgage Advisers shares his top tips for getting the best deal on your mortgage in 2018.

 


The mortgage market in 2018

According to data from UK Finance, the number of mortgages approved in November was down 5% year-on-year, perhaps reflecting a slower property market in recent months.

With this in mind, lenders are continuing to offer competitive mortgage deals, as buyers and home-movers look to take advantage of cheap rates on fixed-rate mortgages.

Elsewhere, there are also signs that banks are offering products with higher loan-to-value (LTV) ratios. Yorkshire Building Society recently dropped its rates on two-year fixes for people with a 10% deposit, and Barclays announced a series of product changes this week, including on its Help to Buy mortgage range.

In light of the number of deals available, David Blake encourages home owners to think about their options for cutting their mortgage costs in 2018.

Overpay now, save later

While rates are low, it’s a good time to pay a little extra off your mortgage each month (provided you can afford to and your lender allows you to).

Overpaying now means that you’ll have a lower outstanding balance if rates rise in future, allowing you to get a better deal.

Alternatively, if you can afford higher repayments and are prepared to commit to them every month, reducing the term of your mortgage could save you thousands in interest payments down the line.

How overpaying can cut your mortgage term

Overpaying by £100 a month can have a significant effect on how quickly you can clear your balance.

If you have a mortgage of £150,000 with 20 years remaining (interest rate of 3.5%), overpaying by £100 each month means you’ll be mortgage free two years and 10 months earlier – saving a little over £9,000 in interest.

 

Weigh up your remortgaging options

Mortgage rates remain cheap at a number of LTVs, even if most aren’t quite at the historic lows enjoyed last year.

This means that for some people, it could make sense to remortgage early to take advantage of low rates and the protection offered by longer-term fixes.

Depending on your current deal, remortgaging now could save you money in the long run – even if your current deal is subject to an early repayment charge.

Remortgaging early won’t be the right choice for everyone, though, so it’s best to speak to a independent broker about your personal circumstances before taking the plunge.

Why are people fixing for longer?

Five year fixed-rate mortgages have become more popular due to a combination of greater competition in the market and economic uncertainty.

Two year deals remain the most common, but require buyers to be proactive in switching their mortgage before the end of their fixed term.

In the last year or so, lenders have begun to compete more in the five-year market. This comes as buyers and remortgagers seek to protect their rates for longer amid uncertainty around the wider economy – specifically the Brexit process and the prospect of the Bank of England base rate increasing again.

The overall average for a two-year fixed rate deal now stands at 2.33%, while the average five-year fix is available for 2.82%, according to analysis of Moneyfacts data.

Consider an offset mortgage

If you have significant savings, you could consider offsetting your mortgage.

An offset mortgage is linked to a savings accounts, and interest is calculated on the amount you borrow minus how much you have saved.

For example, if you have an offset mortgage of £200,000 that is linked to a savings account containing £20,000, you’ll only pay interest on £180,000.

A word of caution, though. Offsetting could mean you miss out on the best savings rates. You might also find you have a smaller pool of mortgages to choose from.

Best offset mortgages at 75% LTV (by initial rate)

Lender Type of mortgage Initial rate  Reversion rate APRC  Fees
Yorkshire Building Society Two-year fixed 1.44% 4.99% 4.6% £1,495
Yorkshire Building Society Three-year fixed 1.82% 4.99% 4.4% £995
Yorkshire Building Society Five-year fixed 2.09% 4.99% 4.4% £995

Best offset mortgages at 85% LTV (by initial rate)

Lender Type of mortgage Initial rate  Reversion rate APRC  Fees
Yorkshire Building Society Two-year fixed 1.67% 4.99% 4.6% £995
Accord Mortgages Three-year fixed 2.14% 4.99% 4.4% £995
Accord Mortgages  Five-year fixed 2.37% 4.99% 4.2% £995


Source: Which? Money Compare

Arrange a new mortgage in advance

If your fixed term is expiring later this year, that doesn’t mean you have to wait to set up a new deal.

When lenders offer you a mortgage, it can be valid for up to six months – so if your deal is set to end in the summer, there’s no reason why you can’t shop around in the spring.

This will give you more time to choose the best product, and more certainty about your financial outlook.

Note: Mortgage data taken from Which? Money Compare. Correct as of 5 January 2018.

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