Better mortgages can give you a day off work
I LOVE the words ‘compensation package' as an alternative to a salary. In many ways we are compensated for being at work, away from our families, the garden, the mountains or the beach.
With the smallest of tweaks to our financial planning, we can easily be 20-30 per cent more efficient with our money, which I translate into one working day ie 20 per cent of five days.
I'd rather have the Monday off than give it to the taxman, a mortgage that is too high, or investments that are too expensive or poor performing.
Let's look at the monthly cost of a mortgage to see how efficient we can make that.
Lenders have been tightening on mortgage costs for those who have less equity in their home. Equity is the gap between the current value and the loan you have against it.
There is an optimum deposit to put down on a property, and if you are just the wrong side of it, the costs are punitive. Pulling together what deposit you can, from wherever you can, will pay dividends.
For example, if you put down a 10 per cent deposit on a house and borrowed £200,000, the difference in monthly cost is considerable. A 95 per cent loan to value will cost you 4.06 per cent, whereas a 90 per cent loan to value will cost 2.74 per cent on a two year fixed rate. The extra amount seemingly represents the risk to the bank of you defaulting, or falling house prices and them losing money.
The bigger the buffer, the more the monthly saving. There is a significant jump between a 95 per cent mortgage and a 90 per cent mortgage and after that the severity tails off considerably. And so a 10 per cent deposit is the optimum.
If you had a £200,000 property where you had put down a 5 per cent deposit, the interest is £676.67 per month. That's £220 per month more than if you put down a 10 per cent deposit. £220 is actually over 48 per cent more than the £456.67 a 90 per cent mortgage would cost.
That translates to midday Wednesday of a working week in inefficiency.
In certain cities, house prices have plateaued but in other regions they have soared so when your current deal ends, be sure to look to another lender as you may well be in a better loan to value range after the increased house price is taken into account.
Other mistakes to avoid to maintain your mortgage efficiency are less obvious:
If you are on a standard variable rate, approach your mortgage broker to see what can be done. A standard variable rate, where your mortgage fluctuates with the markets, will often be more expensive than the discounted and fixed rates available in the market, as your lender will let you roll into a more penal rate on the basis of your potential apathy.
For example, one lender has a two year discounted rate today of 1.7 per cent but it automatically rolls into a 5.44 per cent rate at the end of the two years. Many rate changes are less obvious than that, and their subtle changes create an apathy that leaves the mortgage customer in a much more expensive rate.
Are you on a repayment mortgage? If so, find out if the interest is calculated daily or annually. Otherwise you will have been paying off interest each month for no benefit. If you move to a daily interest, each payment of capital will automatically begin to reduce your interest payments and will save you thousands over the term of the loan. Few still have this outrageous practice but it's a simple question to check.
And finally, remember to shop around for your mortgage. Fees are different, as are rates. For example, let's take a £200,000 mortgage on a £225,000 property (89 per cent mortgage).
One of the best two year fixed rates today is 1.74 per cent. Over the 25 year term the borrower will have repaid £305,024 with the initial monthly payment at £822.62.
Yet, there are others charging just 0.1 per cent more where the additional costs take the payment over the term to £327,117. You'll find that £25,000 is better spent elsewhere.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you would like a mortgage review call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net.