How to reduce your mortgage payments (according to the experts)

Mortgage bills

After more than a decade of low interest rates, mortgage borrowers are facing hefty increases in repayments this year.

Rising interest rates mean homeowners are now facing significant increases to their monthly bills.

Andrew Montlake, from mortgage broker Coreco, estimated that borrowers are seeing costs “that are increasing by more than £500 – and some by more than £1,000”.

At the same time, despite dropping a little in recent weeks, the rates on average two and five-year fixed-rate mortgages also remain elevated.

Borrowers who need to remortgage soon are facing a “payment shock”, Mr Montlake said, with today’s rates up to 5pc higher than where they were previously.

While all this can make for worrying reading, there are steps you can take to make things more affordable, even when times are tough. Here, we run through the best ways to reduce your monthly mortgage repayments.

Extend your mortgage term

A common way to reduce your mortgage payments is by increasing your term.

This will spread your repayments over a longer period of time, lowering your monthly bill  and making your mortgage more affordable.

Analysis from SPF Private Clients shows that on a £200,000 repayment mortgage with a rate of 5.5pc, the monthly cost would be £1,228, based on a 25-year term. But if you extend this to 35 years, your payments would only be £1,074 per month.

However, the overall cost of your home loan would increase with a longer term, as you would have to pay back more interest on the money you have borrowed.

Whether or not you are permitted to extend your term will also be at your lender’s discretion.

Mark Harris, of broker SPF Private Clients, said: “Some lenders have restrictions around the maximum age they will allow, particularly if the longer term takes the borrower into retirement age.”

Consider switching to an interest-only deal

Another way to lower your monthly costs is by switching from a repayment loan to an interest-only mortgage.

This will mean you will only pay the interest due on the money borrowed, and not chipping away at the capital, bringing down your payments significantly.

On our £200,000 example mortgage, with a rate of 5.5pc and a 25-year term, you would pay £1,228 a month on a repayment basis. Switching to interest-only would bring that down to £917.

However, switching to interest-only means that you are not paying off any of the money you borrowed, said Jonathan Harris from Forensic Property, another mortgage broker.

“The problem with this approach is you are not making any dent in the debt, and so will need to have a plan for repaying the mortgage at the end of the term,” he added.

You could plan to sell your property when your loan expires to repay the outstanding mortgage – but you’ll need somewhere to live, and cash to cover your move.

Aaron Strutt, of broker Trinity Financial, said: “One option may involve taking just part of the mortgage on interest-only. That way, some of the capital is being repaid. You could also think about switching to interest-only as a temporary measure, and swapping back to capital repayment in a few years.”

Switching to interest-only, as with extending the term, also means paying more interest over the term of your loan.

Mr Montlake said: “It’s important not to lose sight of this. That said, at present, people are generally more concerned with monthly payments.”

Consider a tracker

Many borrowers are considering switching to a tracker mortgage – as opposed to a fix – in the hope rates will come down over the near term.

Making this move could help you reduce your monthly payments – for a time, at least. They charge interest based on the central bank rate plus a certain percentage, so if they Bank of England brings rates down, your mortgage costs will fall.

Paula Higgins from the HomeOwners Alliance said: “A penalty-free tracker allows homeowners to take a holding position, from which they can switch and fix once the current cycle of interest rate hikes finally ends.”

This means the borrower has more control over their situation.

Mr Strutt said: “Tread carefully though, as not all lenders offer their customers flexible products without tie-ins when their deals end. Be sure to check this before committing.”

Now read: Fixed-rate mortgage or tracker? How to tackle high interest rates

Avoid a variable rate

If you are thinking about taking a ‘wait-and-see’ approach to your mortgage, you need to ensure you don’t fall foul of staggeringly high standard variable rates (SVRs). At time of writing, an increasing number of lenders’ SVRs are reaching 8 or 9pc.

If your current term is due to end in six months’ time, you need to start looking now to secure a rate – and avoid falling onto your lender’s SVR by default.

Ms Higgins said: “Check your deal to ensure you’re not potentially paying thousands of pounds a year more than necessary. If you’re on your lender’s SVR, you need to switch quickly.”

Look at offsetting

For some, an offset mortgage could be another consideration. With this arrangement, a lender will ask you to keep a certain amount of cash in a savings account with them to “offset” the capital of your mortgage.

Mr Montlake said: “These savings can be used to bring down mortgage payments, without you losing access to that money, if needed.”

According to figures from SPF Private Clients, on a £200,000 repayment mortgage with a rate of 5.5pc and a 25-year term, your monthly payment would be £1,228. But if you put £40,000 into an offset mortgage, you could reduce its term by five years and eight months, or reduce the mortgage payments to £1,045.

Mark Harris said: “While an offset gives a lot of flexibility, one of these mortgages can be more expensive than a standard home loan. Also be aware that the overall effectiveness can be affected by the borrower’s tax status and rate of interest they are getting on their savings.”

As a general rule, an offset is most useful for high and additional rate taxpayers.

Now read: How your savings can cut your mortgage and tax bills at the same time

Is it better to reduce the term of my mortgage or overpay?

If you are in the fortunate position of having a bit of cash to spare, a helpful way to lower your overall mortgage debt is by making overpayments.

This may not actually reduce the monthly cost, but will reduce the term, bringing down the overall cost of your mortgage over its lifespan.

Be sure to check the small print of your loan to see what you lender permits, however.

Mark Harris said: “Most lenders will let you overpay by 10pc of the outstanding mortgage per year without incurring a penalty.”

According to figures from SPF Private Clients, on a £200,000 loan at 5.5pc, over a term of 25 years, the monthly payment would be £1,228. Overpaying by £200 a month would reduce the debt by nearly £48,000 and ensure it is cleared just over six years early.

But while this can offer protection in times of housing market volatility, does it make more sense to do this, or to shorten your mortgage term?

Both involve paying more each month, but accomplish similar results, experts said.

Mark Harris added: “Either option will bring down the debt and ensure it is paid early. Of the two, reducing the term is more restrictive, as payments would be contractual. By contrast, overpaying provides the borrower with some flexibility should that ‘unforeseen circumstance’ occur.”

This is a view shared by Jonathan Harris.

He said: “On balance, I would suggest overpayments, as this provides greater flexibility if you are on a tight budget.”

Ultimately, the right decision will come down to your personal and financial circumstances.

Whatever you decide, you need to find the balance between affordability and any desire to repay your mortgage faster.

Will my mortgage payments go down after five years?

If you are currently on a five-year fix, you may be able to bring your payments down when that deal comes to an end. However, any ability to do so will depend on you being able to remortgage to a cheaper rate at that time.

As things stand, the Governor of the Bank of England has said he will do anything to bring down inflation - including bringing up the base rate again.

Mr Strutt said: “It seems unlikely the base rate will come down this year. But the hope is that rates will come down to more affordable levels over the next year or two – with the ‘new normal’ base rate likely to be between 3-4pc over the foreseeable future.”

The problem is that nobody can see the future clearly.

Mr Montlake added: “What we do not know is exactly where rates will be in the future. While the market suggests we will have slightly lower rates in five years’ time, as we have seen in the past few years, anything can happen. Expecting the unexpected is probably wise.”

This article is kept updated with the latest information.