Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in and we’ll get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his guidance to a reader below. If you have a question for our experts, email us atmoney@inews.co.uk.
Question: I have enough to put down a 40 per cent deposit on a £350,000 home. Is it better to pay a large a deposit as possible to get a smaller mortgage or is it in fact more beneficial to use a smaller deposit and put the rest of the money in a high interest savings account? I have found one where I can get a rate of 5.2 per cent. As the mortgage rate is 5.5 per cent, I was wondering what might be better?
Answer: It’s often worth trying to contribute the highest percentage deposit that you can. This will get you access to better mortgage interest rates, which – combined with the fact that you’ll be borrowing less – can greatly reduce the interest you’ll pay overall.
However, you need to carefully consider if your deposit money is better spent elsewhere. Similarly, when making overpayments on your mortgage, it can be a great way to lower your debt and save yourself money. Overpayments mean you can reduce the loan amount, letting you either lower your monthly payments or shorten your loan term.
But if you have a savings account earning a higher interest this could beat overpaying on the mortgage. This depends on several things, including whether you are planning a one-off overpayment or if you want to overpay monthly over the mortgage term, how much your mortgage debt is, how many years you have left to repay your mortgage and whether you pay tax on savings interest.
If you have other debts, you may find it more beneficial in the long term to pay these off rather than increasing your mortgage deposit. To see whether this is relevant, you will need to compare the interest rates, loan length and any other clauses on your mortgage and other debts.
It is also often sensible to make sure that you still have a suitable emergency fund in case any problems come up.
Mortgage rates have also significantly reduced in the past few months, with Halifax, NatWest, Santander and HSBC offering sub four per cent fixes up to 60 per cent LTV (those with 40 per cent deposits or equity).
You may also want to consider an offset mortgage; this is when your savings are offset against (counterbalance) your mortgage to reduce the amount of interest you’re charged. Essentially the lender subtracts your savings held in a linked account from your outstanding mortgage balance at that time.
For example, if you have a mortgage of £200,000 and savings of £50,000 in a linked account, you would only be charged interest on £150,000. This arrangement can lead to substantial interest savings over the life of the mortgage, shorten the loan term, or both.
I would strongly recommend speaking with a mortgage broker can get the best deal based on your needs and circ*mstances, as the rate of 5.5 per cent certainly seems high in today’s market considering the deposit you are able to put down.
Answer: It's often worth trying to contribute the highest percentage deposit that you can. This will get you access to better mortgage interest rates, which – combined with the fact that you'll be borrowing less – can greatly reduce the interest you'll pay overall.
From a financial perspective, it's usually best to invest your money rather than funneling extra cash toward paying your mortgage off faster. Of course, life isn't just about cold, hard numbers. There are many reasons why you might choose either to pay your mortgage early or invest more.
Your $10,000 buys down . 25%, lowering your interest rate to 6.875%. As you can see, buying down points reduces your monthly mortgage payment and saves you money on interest over the life of the loan. Alternatively, you could choose to put an additional $10,000 toward your down payment.
In principle, if you're offered a higher interest rate on a savings account than the rate you pay on your mortgage, it could mean it's best for you to save. However, if you're paying a higher interest rate on your mortgage than you could earn from a savings account, it might be best to pay off your mortgage first.
If your mortgage rate is similar or higher than your savings rate, overpaying can be beneficial. Considering the current financial climate can help you make your decision. For example, if interest levels on saving deposit accounts are low, using spare cash to pay extra on your mortgage may make more sense.
If home values are rising, a larger down payment could help you secure a better mortgage rate. Conversely, if the market is volatile, it may be wise to hold onto your cash. Remember, the decision should align with your personal financial situation and goals.
While high-yield savings accounts offer higher interest rates than traditional savings accounts, they may not outpace inflation, potentially eroding your purchasing power over time. As a result, they're not typically recommended for long-term wealth-building or retirement savings.
That said, there are benefits to making a higher down payment. Namely, when you put more money down up front, you'll pay less per month and less interest overall.
On a $100,000 mortgage with an interest rate of 3%, your monthly payment for principal and interest would be $421 per month. If you purchase three discount points, your interest rate might be 2.25%, which puts your monthly payment at $382 per month.
It gets its name from the variable rate of reduction during those first three years: 3% for the first year of financing, 2% for the second, and 1% for the third (and final) year of reduced-rate payments. From the fourth year onwards, you'll pay the full interest rate.
Generally speaking, overpaying your mortgage is always a good idea. When inflation is high, paying more towards your mortgage means the higher rate of interest is applied to a smaller debt, therefore making it more affordable overall.
Deciding on a set amount you are going to overpay regularly could help you budget. And if things change you can stop at any time. A lump sum could save you money on interest and clear your mortgage faster, but you won't be able to get your hands on the money once you've paid it over.
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
That said, “if it fits into your budget, you want to get rid of the debt and you're in good shape with other savings or investing goals, make extra payments on your mortgage,” says Linda Bell, senior writer at Bankrate. “Every additional dollar shaves time off your loan and saves you interest.”
The golden rule with mortgages is to save as large a deposit as possible. The larger your deposit, the cheaper your mortgage rate will be. Mortgages are categorised according to their loan-to-value (LTV). This means the percentage of the mortgage as a value of the property.
Making 2 extra mortgage payments a year can lead to substantial savings on interest and help you pay off your mortgage years earlier. However, the exact impact depends on a few different factors, including your loan terms, interest rate, and how early in the loan term you start making additional payments.
When you make an extra payment or a payment that's larger than the required payment, you can designate that the extra funds be applied to principal. Because interest is calculated against the principal balance, paying down the principal in less time on your mortgage reduces the interest you'll pay.
Banks are trustworthy institutions that are insured and banked by the federal government. However, a few unique benefits come with keeping some cash stashed in your home. As long as you're being smart about protecting your money, there's no reason that you shouldn't own a wad of cash in your home.
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
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