Mortgage payments are a huge commitment. They are usually the largest outgoing payment for most households, and the longest investment of their entire life.
With such a big debt to manage, it can be a daunting payment to budget for each month. However, there are options out there to make this loan a little more manageable. Whilst also giving you greater control over your finances.
How do mortgage payments work?
When you obtain a mortgage, you will be expected to make monthly payments that contribute toward paying off your mortgage loan. It is important to remember that your mortgage repayments are made up of two factors: the capital and interest.
Part of your monthly payment will be directly paying off the outstanding mortgage balance. Whilst the rest of the payment covers the interest that is charged on your loan.
How much are mortgage payments?
If you are yet to commit to taking out a mortgage, there are thousands of mortgage repayment calculators on the internet that will give you a good idea of what your monthly payments could look like.
In spite of that, when we discuss how much your mortgage payments will be, it does largely depend on the following factors:
It is mostly during the early stages of your loan term that the mortgage repayment balance is slightly off. During this time, you will be paying a large chunk of your mortgage repayments on your interest rate. Whilst a smaller part will contribute towards paying off the actual capital.
However, as time passes and the more capital that you pay off, you will start to notice your interest repayments decrease.
You can use our mortgage payment calculator to help you with your research into how much your monthly payments might be.
5 ways to lower your mortgage payments
Change from a Standard Variable Rate (SVR) mortgage
The majority of homeowners will initially start with a fixed-rate mortgage. This is a type of mortgage where the interest rate that you pay on your mortgage does not change for the duration of your deal. The length of time on fixed-rate mortgage deals is subject to your lender. They generally last anywhere between two and five years.
However, once that time is up and your deal comes to an end, you will automatically switch over to your lender’s standard variable rate (SVR). This will take place unless other arrangements have been discussed prior to your deal ending.
You can expect the SVR rate to be much higher than your previous fixed-rate deal. A lender will typically add between 2% and 5% above the rate that has been set by the Bank of England – known as the base rate.
According to research by Experian, those who have a mortgage could save up to £5,0001 if they considered switching to a new fixed-rate deal. If you are planning to find a new fixed-rate deal, we would recommend starting to look at least a few months before your old one comes to term. It is always a good idea to speak to a mortgage adviser to check what deals are out on the market. Mortgage advisers will have access to deals that may not be readily available for you to see.
Find a cheaper mortgage deal
Is your lender willing to offer you a cheaper deal?
Are there other lenders that are offering better rates?
It is always good to check and compare against other deals that are being currently offered on the market.
You may find yourself in a situation where it will work out much cheaper if you switch. This is especially beneficial if your home value has increased.
It’s important to bare in mind that if you are going to switch to a different lender, contract termination costs may apply. Therefore, take into consideration potential early repayment charges and product fees. When comparing new deals, look at them from a long-term perspective and how much money you will be saving each month.
Extend your mortgage term
This is applicable to all mortgages except for those that are interest-only. When you increase the term of your mortgage, the outstanding balance of your capital is spread over a longer period. This will significantly lower your monthly mortgage payments.
The biggest downside to extending your mortgage term is that in the long term you will be paying more on your interest. However, if you do go ahead with this option, check with your lender if it’s possible to overpay on your mortgage payments. This will inevitably reduce your interest charges over time.
Overpay on your mortgage where possible
You can significantly cut down on your monthly mortgage payments by overpaying as much as you can. Taking action now means that you will be making lower payments in the future on your mortgage.
Despite the spike in interest rates, they are still considered to be historically low. Therefore, it is always beneficial to overpay your mortgage payments when you can afford to do so.
A lower interest rate means that your overall monthly mortgage payment will also be a lot lower. It also gives you more flexibility with your capital repayments.
If you are really struggling to meet your monthly mortgage payments, a remortgage might be a more suitable option for you. Remortgaging allows you to take out a new mortgage that replaces your existing loan.
When you remortgage, it gives you the opportunity to see if you are able to obtain a lower interest rate. You may also be able to extend your loan term which will further reduce your mortgage payments.
Although a remortgage can save you money on interest and lower mortgage payments, it isn’t always worth it. You need to take into account that you will be paying off a larger loan for a longer period of time.
Before you make any decisions surrounding your mortgage payments, it is always beneficial to explore your option with a trusted mortgage adviser.
Your home may be repossessed if you do not keep up repayments on your mortgage.
1YBS – Ways to cut your mortgage payments