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Richard Morea Even small payments can save you a lot of money in the end
SIMPLY paying down your debts is not enough, you should start with the most expensive first, says Neil Thomas, director of IFAs Simpsons of Brighton. “List your debts according by interest rate and focus on clearing the costliest, although make sure you won’t be hit by any penalties for repaying them ahead of schedule.”
If you have any expensive short-term finance, such as payday loans or even doorstep lending, that should be your priority. “Store cards are also expensive with APRs around 25%. Most credit cards charge between 15% and 20%, and should also be cleared at the earliest opportunity,” Thomas says.
Your mortgage will probably be last on the list, because this is typically the cheapest way to borrow money. Making regular overpayments into a current account or offset mortgage can help you drive down your debt much faster than you think.
If you owe £100,000 over a 20-year term with a 4% interest rate, your monthly repayment would be £606. If you paid in an extra £100 a month you would clear your mortgage four years earlier and save an astonishing £9,883 in interest.
Most standard mortgages allow you to make overpayments of up to 10% a year or £500 a month, depending on the lender, says Richard Morea, technical manager at brokers London & Country Mortgages. “Even relatively small repayments can save you a lot of money in the long run. If you’re keen to overpay, check how much flexibility your lender offers to avoid incurring penalties for repaying too much.”
At time of writing, Newcastle building society offered a two-year tracker at 1.99% over base rate up to 80% loan-to-value (LTV), with a £994 arrangement fee. This competitive deal allows you to overpay by up to £500 a month, or £6,000 a year.
Borrowers with a large pot of savings could use an offset mortgage instead, using their savings to reduce their monthly interest repayment. “First Direct allows offsetting across its mortgage range, and this could prove attractive with anybody who has more than, say, £15,000 in savings.”
Another way to repay your mortgage faster and slash your repayments is to simply reduce the repayment term, say, from 20 to 15 years.
By Harvey Jones |
