Use Any Extra Funds to Pay Down Your Mortgage
March 2, 2009
In the current credit crunch many homeowners in the UK are striving to build up their savings accounts so that they have money to fall back on just in case they may encounter financial difficulties in the future.
They do not realize that it would be more beneficial for them to pay down their mortgage with the extra money instead. The recent cuts in the interest rates by the Bank of England is the perfect opportunity to overpay your mortgage at the lower rates so that more of your payment will actually go towards paying down your outstanding balance because less of the payment will go towards paying the interest on the loan.
According to the banking authority, HSBC, homeowners can save thousands of pounds each year by choosing to over pay your mortgage. For those customers with tracker mortgages, the amount of mortgage repayments required each month have fallen dramatically over the past few months. By overpaying your mortgage with a little extra money each month, you can lower the term of the loan by several years, which means you will own your home much earlier than you think.
The best thing to do, according to the HSBC is to keep paying your mortgage according to the same payment you were making back in September. Since you have already budgeted for this amount and are able to make a payment larger than you are required to make, it will pay off for you in the long term. In this way it won’t even seem as if you are overpaying your mortgage and you won’t notice any financial hardship as a result.
This recommendation made by Martijn van der Heijden, HSBC’s head of mortgages will not only cut years off the term of your mortgage, but will drastically reduce the amount of interest that you pay on the outstanding balance each month.
The recommendation is similar to one made by moneysupermarket.com. According to the spokesperson for the UK price comparison site, Louise Cummings, such action in overpaying your mortgage would be especially beneficial for those approaching retirement. Instead of putting the extra money they realize from the lower payments, UK homeowners should pay it on their mortgage so that they come closer to their dream of owning their home outright and not have to make any payments out of their retirement income.
At today’s Bank of England rate and assuming that this rate will remain in place for the rest of 2009, Lloyd’s TSB experts say that homeowners can shave as much as 12.5 years off the mortgage by continuing to make the same rate of payments they have been making in the past. This is the lowest level that interest rates have been in the UK in over 300 years. If you take the amount of money by which your payment has been reduced and multiply it by the number of months remaining on your mortgage it is highly unlikely that it will be equal to the amount of money you can save in interest and by lowering the term of your mortgage.
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