Everyone wants to clear their mortgage early but it can feel like a hard slog reaching the goal. However, flexible mortgages and offsetting schemes are helping more borrowers clear their home loans ahead of schedule with very little pain.
Flexible loans
Most mainstream lenders, including Abbey, Alliance & Leicester, Cheltenham
& Gloucester, Halifax, Nationwide and Woolwich, part of Barclays, allow
borrowers to overpay up to ten per cent a year on all their mortgages without
facing penalties. Borrowers do not even need a large lump sum to make overpaying
worthwhile. By increasing monthly repayments by just £100, you can achieve
huge savings.
For example, a borrower with a £100,000 repayment loan at five per cent interest would clear the mortgage-about six years early and pay almost £20,000 less interest.
Homeowners who want to overpay more aggressively should consider fully flexible mortgages. These allow borrowers to make unlimited overpayments without penalty. Flexible loans will calculate the interest you owe on a daily basis, rather than the traditional monthly or annual interest. This means that you benefit from any overpayment straight away.
But borrowers must expect to pay a slight premium for the flexible features, compared to the best fixed and discounted rates available. Alliance & Leicester has a five-year flexible loan with a starting pay rate of 4.79 per cent – representing a 1.80% discount off the lender’s standard variable rate. Abbey has a fully flexible deal at 4.99%.
Offset mortgages
The idea of offsetting originated in Australia but it is already growing in
popularity here with a range of providers including Egg, Intelligent Finance,
Yorkshire Building Society, Newcastle Building Society and First Direct, in
the market.
The concept is simple – any savings you have can be used to offset against your mortgage debt. You continue to pay the full monthly mortgage repayment based on your loan debt, but because your savings cancel out part of that debt effectively you are making overpayments each month – and will clear your debt earlier. Your savings remain in your control so you can draw back on them at any time.
Intelligent Finance (IF) has an offset loan with fixed or variable rates. A borrower with a £150,000 repayment loan over 25-years with a variable rate of 4.74 per cent for two years followed by a rate of 5.7 per cent and offsetting £20,000 of savings against the debt would clear their loan three years and nine months early and save £46,000 in interest.
Independent mortgage adviser David Hollingworth, at London & Country Mortgages, says Hinckley & Rugby Building Society has one of the best deals - a tracker at 0.15% above base rate for life and an offset facility can be bolted on.
Current account mortgages
The One Account, operated by Royal Bank of Scotland, is a current account mortgage
which allows the borrower to offset any balance in their bank account, plus
any savings, against their mortgage debt – so interest is paid each month
on the balance. However, the rate is much higher than the best traditional mortgages
available, starting at about 5.6%.
