If your mortgage costs have increased considerably over the past few months, or you’re expecting them to rise in the near future, then you’re not alone.
Indeed, the Guardian reports that the average two-year fixed-rate mortgage rate was 6.85% as of 3 August 2023. For reference, Statista reports that the average two-year fix in May 2023 was just 4.73%.
As you can imagine, this rise in mortgage rates has left many homeowners struggling with the increased financial burden. Even if you’re currently on a competitive deal and haven’t felt the strain of rising costs, it’s imperative to recognise that your deal will eventually end, and you could end up paying much more.
In fact, the BBC states that mortgage payments will rise by at least £500 a month for around 1 million households by the end of 2026.
Thankfully, there are some proactive steps you can take to alleviate some of the financial strain that rising mortgage payments may cause. Read on to discover five ways to potentially save money on your mortgage.
1. Shop around for a new deal
First, it could be wise to keep a close eye on the market for better deals and shop around to ensure you’re benefiting from the most competitive rate. You can typically do this if you’re coming to the end of your fixed- or tracker-rate deal, or if you’re moving home.
Generally, you can secure a new deal up to six months before your current one ends. As such, starting your search early and securing a new deal well in advance may be prudent to avoid finding yourself on your lender’s typically uncompetitive standard variable rate (SVR).
If you secure another deal as early as possible, you could ensure that the transaction concludes immediately after your current one expires. This can help you to save money on excess interest costs by avoiding your lender’s SVR.
If, after shopping around, you find a deal with even a slightly cheaper interest rate, this could considerably lower the amount you pay each month.
2. Speak to your lender
It may also be wise to reach out to your lender and check whether they could help you reduce your payments through other means.
For example, they could allow you to take a payment holiday. This is essentially an agreement where your lender will enable you to temporarily stop your payments, giving you a few months of respite if you’re struggling with costs.
However, it’s important to remember that you’ll still accrue interest during your payment holiday, so your outstanding balance and monthly repayments could be higher when it ends.
Your lender may also suggest extending the term of your mortgage. This means you’ll be paying off your mortgage for longer, but your monthly payments will typically decrease.
In fact, according to MoneyHelper’s mortgage calculator, a £200,000 capital and interest mortgage at a rate of 6% over 25 years would see you paying £1,095.31 a month. If you extended the term to 30 years, you’d pay £1,019.24 each month.
While several options are available to deal with rising mortgage costs, your lender can help you determine which would best suit you.
3. Consider overpaying your mortgage before your current deal ends
If your lender permits it, and you’re on a low interest rate now, you could also overpay your mortgage. By doing so, you’re reducing the amount you owe, which could, in turn, lower your repayments when you come to switch your deal.
Of course, overpaying may sound slightly counterintuitive when you’re looking for ways to save money on your mortgage. However, if you’re currently on a relatively low rate, it may be wise to overpay your mortgage now before your deal expires and you move onto a higher rate.
Doing so will lower your total balance when you eventually come to remortgage at a higher rate.
The Times Money Mentor states that you could potentially save tens of thousands in the long run by overpaying, and it could even mean that you head into retirement debt-free. This could make a considerable difference to your lifestyle when you stop working, as you won’t have a mortgage to repay.
Before you overpay, it’s important to check your lender’s terms and conditions, as you could face early repayment charges. Typically, you can repay up to 10% of your total remaining mortgage debt each year.
Also, while overpaying your mortgage does come with long-term benefits, it’s vital to ensure that you can still maintain your short-term financial resilience. If higher payments mean a financial shock would leave you struggling, it may be wise to think twice about overpaying.
4. Temporarily switch your mortgage to an interest-only basis
Another potential method to save money on your mortgage is by temporarily switching your mortgage to an interest-only basis, if your lender will allow you to do this.
As the name suggests, this is where you only pay the interest on the amount you borrowed each month, and you typically don’t need to pay back the total amount until the term has ended.
This differs from a capital and interest mortgage, where you must pay back the interest and some of the loan each month.
It may be prudent to switch to interest-only if you have a clear plan of how you intend to repay the mortgage at the end of the term. In fact, before you can switch to an interest-only basis, your lender may ask to see evidence of your ability to pay back the full amount.
If you do move your mortgage to interest-only, your monthly payments will typically be lower.
MoneyHelper’s mortgage calculator shows that a £200,000 LTV capital and interest mortgage with a rate of 6% over a 25-year term would see you pay £1,095.31 a month. If you switched the same mortgage to an interest-only basis, your monthly payments would drop to £850.
Of course, you’d then have to establish a method of paying back the £200,000 you owe at the end of the term.
5. Speak with a professional
As you can see, many different options are available to you to save money on your mortgage. So, above all, you may want to speak to a professional before you make any critical decisions.
We could help you source a new deal that is more competitive than your current one, preventing you from being moved to your lender’s uncompetitive SVR.
Better yet, we can work closely with you to establish which methods of saving money on your mortgage would best suit your circumstances.
Please email enquire@london-money.co.uk or call (0207) 808 4120 to find out how we could help you.
Please note
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it. Think carefully before securing other debts against your home.