1. My mortgage costs a bomb. Is there anything I can do?
. If you’ve had a mortgage for some time and you haven’t changed it, you are probably paying far too much for it. If you swap to one of the dozens of cut-price deals on offer you can save money every month – thousands of pounds over the next few years.
2. You sound like a salesman. Show me some figures.
The bog-standard mortgage lender charges what is called ‘standard variable rate interest’. In other words, no discounts, no special deals and the interest rate goes up and down as interest rates rise and fall generally. At the moment a lot of these lenders charge 7.74% per year on your mortgage debt. So if you have a loan of £60,000 you pay £4644 a year in interest – around £387 a month. I can cut that by £1044 a year for the next five years. A saving of £87 a month or £5220 over the five years. And the bigger your debt, the bigger the savings.
3. How?
Change your mortgage to the best risk-free five-year deal currently on the market. Derbyshire Building Society offers you a discount of 1.45% off its standard rate for five years. That means you currently pay just 6 per cent instead of 7.45 per cent. And there are no penalties if you want to move your mortgage again.
4. Explain ‘risk-free’ and ‘penalties’?
This deal is a variable rate mortgage. It is a discount off the society’s standard mortgage. So if interest rates in general fall, the cost will come down further. If they rise it will go up. I call that ‘risk-free’ because the alternative is a ‘fixed rate’. With those rates, they are guaranteed not to change but if interest rates fall you could be a loser. In other words they are a gamble on the rate of interest. And fixed rate deals usually lock you in by imposing a penalty – i.e. a hefty fine – if you leave before the end of the fixed rate, or even longer. Avoid them.
5. Can I save more than £87 a month?
Greedy! There are cheaper deals, but they only last for two or three years. The cheapest is from Universal Direct that is 5.19% over two years. On a £60,000 loan that saves you £127.50 a month or £3060 over the two-year period. After that, look elsewhere. All the banks and building societies are after your business. The more customers they have, the cheaper they can borrow the money they lend you. One way to get new customers is stealing them off their rivals. So prices come down.
6. Where’s the catch?
There are some costs. Your home will have to be valued, say up to £300. You will have some legal paperwork to do, so reckon to pay a solicitor a similar amount. And some lenders – like Universal Direct – will charge you a fee, again around £300, for arranging the whole deal. But others don’t and some – like Derbyshire Building Society – will even give you back the cost of your valuation or legal fees.
7. I never have any luck with money. What might stop me succeeding?
First, you might already be locked into a mortgage deal with a big penalty for getting out. Ask your lender if you can shift to another of their products. Or simply pay the penalty. It might be cheaper in the long run. Second, some of the best deals won’t cover more than 70% of the value of the property. But there are great deals where you can borrow up to 95%. Third, your income may have fallen or you have run up a bad debt somewhere – that puts lenders off. Fourth, some lenders only operate in some parts of the UK.
8. Where do I find out more?
You have to find the most appropriate deal for your circumstances. But the internet is a marvellous source of information – I would go to www.moneyfacts.com as a start. It is a purely factual site, not linked to any financial institution. Or you can pay an advisor – but they may charge up to 1% of the loan.
9. So why doesn’t everyone do this?
Want to know the sad truth? I haven’t done it. It’s called inertia. And it is one of the ways that financial institutions rob us blind. We don’t pay attention. We don’t switch.
10. Why should I change if you haven’t bothered?
Two reasons. £1000 a year. And by the time you read this, I will have done.
Details correct at time of writing.
WEBWATCH
28 October 2000
e-mail Paul Lewis on paul@paullewis.co.uk