Mortgage payments can consume up to 50% of your lifetime earnings. This article will show you how to save money on your mortgage using 7 simple methods.
Let’s kick things off with tip number #1.
If you want to know the best ways to save money from your paycheck, these articles can help get you started.
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How To Save Money On Your Mortgage
1.An Offset Mortgage
You can reduce mortgage payments by applying or switching to an Offset Mortgage. This allows you to link your current savings to offset against the amount you owe on your mortgage- reducing the interest you pay.
An Offset mortgage is good for people who have extra savings but may need them in the future. An offset mortgage allows you to use your savings to reduce your interest payments but also gives you access to your savings if you need them.
How does it work?
Your savings are placed in an interest-free savings account and their value is ‘offset’ against your mortgage.
Things to bear in mind:
- You can still access your savings if you need them
- You won’t earn any interest on your savings
- It will reduce your monthly payments
- You can get both fixed and standard variable-interest-rate offset mortgages.
- Some banks will allow you to use your current account,as well as your savings account
- Offset mortgage may require you to put down a larger cash deposit
At present, Offset Mortgages are offered to the UK market. Here is a list of Offset Mortgage providers. If you don’t bank with any of them, it’s worth looking at your current mortgage to see if you can switch to an offset- mortgage.
Which leads to the next tip.
2. Refinance to a lower rate
When you initially apply for a mortgage, you will likely be offered a fixed rate of interest for 2-3 years. After that ends, your mortgage will revert to your lender’s Standard Variable Rate, which is normally higher.
Here is an example, the fixed rate is 2.69% for 2 years and then it reverts to 4.19% after.
You can save money on mortgage payments if you re-mortgage your loan and switch it back to a lower fixed rate again. This is entirely possible as my mother did this for our family house and saved herself a huge amount of interest.
- Note. There will be fees associated with re-mortgaging, so make sure you take that into account of your calculation.
3.Refinance to a Shorter Term
Once you have passed the 2-3-year fixed-rate term, it’s also worth refinancing to a shorter mortgage if you can afford higher monthly repayments.
Shortening your mortgage term will help you in two ways.
- You will get better interest rates for shorter-term loans
- Lower overall interest payments
Here is an illustration on the interest you can save if you shorten your mortgage term:
- Try using this mortgage calculator,to see how much you can save in interest payment for different loan terms
4.Private Mortgage Insurance
If you paid a deposit of less than 20% at the beginning of your mortgage, you likely had to take out Private Mortgage Insurance. However, once the mortgage falls below 80 percent of the home’s appraised value – you can ask your bank to cancel the insurance.
This can happen if your home’s value has gone up or you have repaid some of the principal. You may be required to pay for a new appraisal but it could save you hundreds every month.
Your bank may not necessarily tell you that you no longer need PMI, so it’s up to you to be proactive and ask them to cancel it to save you extra money.
5.Recast your mortgage
Recasting your loan is also known as re-amortization. You pay a lump sum towards the principal of your loan and the bank recalculates your principal and monthly interest due. Your monthly payment is reset or re-amortized based on a new, lower amount.
So, you end up with a lower monthly payment over the existing term of the loan, effectively saving on your mortgage.
6. Make overpayments
Do you want to save money on mortgage interest? Overpaying your mortgage when you have a bit of extra cash every month will help you reduce your overall mortgage payments. The interest rate that you are charged is based on the total amount of the loan. So, the sooner the loan balance reduces, the less interest you have to pay.
Most mortgages allow overpayments of 10%, but make sure you check with them first. If you don’t, you may be stung with a penalty charge.
7. Make Bi-weekly instead of monthly payments
Speaking of overpayments, another tip to reduce your mortgage payments is the Bi-Weekly payment method.
Instead of paying your mortgage repayment every month, you can divide the payment into two and pay it every two weeks. However, because there are 52 weeks in a year, a Bi-Weekly payment schedule will result in 13 full-sized payments a year instead of the normal 12. (52 weeks/4 weeks= 13)
So, you save extra money, which goes towards paying off your mortgage.
- Find out the principal and interest total amount you need to pay e.g.;£800
- Divide the amount by half, e.g. £800/2= £400
- Find out if your lender accepts bi-weekly partial mortgage payments.
- Send them £400, every 2 weeks
- Celebrate at the interest you save with the extra payment
Paying off your mortgage takes a lot of commitment and hard work. But if you also work smart, you might be able to be debt-free sooner!
Have you saved money on your mortgage? Please share any tips with us below.
Ps; If you are looking for some extra ways to save, here are a few articles that will help you earn a bit of extra money:
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