Saving Money on your Mortgage

Taking out a mortgage is the largest financial undertaking that many of us will have to do. My tips are based (a) on knowledge gained working in the financial sector and (b) on my experience of having a mortgage.

1) Use (some of) your savings to minimise your mortgage
I’m not suggesting that you use up all your savings on your house purchase, but if you have spare savings then it makes sense to use it. For example, a savings account might pay you 4% whereas the mortgage might be at 6%. Every 100 saved will therefore earn you 4 in interest, whereas every 100 of the mortgage will see you pay 6. For example, let’s say that I’m buying a house for 100,000 and I have savings of 30,000. Usually banks ask for a minimum deposit of 10%, so 10,000. I could instead use 20,000 of my savings and reduce the size of my required mortgage from 90,000 to 80,000. When you factor in interest over the lifetime of the mortgage, this will deliver a big saving.

2) Shop around for your mortgage. Even a half percent difference in interest rate will make a big difference, over the course of the mortgage, especially if the mortgage amount is large.

3) Don’t feel obliged to stick with your mortgage provider for the lifetime of the mortgage. You are entitled to switch providers, so make sure that you keep checking to see whether you could save money by switching. For example, if your mortgage has a 5 year discount and then reverts to the standard variable rate, then at the end of the 5 years you may wish to move to another offer. However, check to see whether there’s a cost to switch and make sure that the cost saving you will get from a better interest rate outweighs that cost.

4) Pay in lump sums (if your mortgage allows this)
Some mortgages (typically called Flexible Mortgages)allow you to make extra lump sum payments into your mortgage. This will help you pay off your mortgage early and very importantly will significantly reduce the amount of interest you pay over the lifetime of the mortgage. An example of how you might do this would be if you get an annual bonus payment from your company.

5) Step up payments as and when you can afford it (if your mortgage allows this)
Again, as with lump sum payments, this will help you pay the mortgage off early and save money on interest payments. For example, when you set the mortgage up you might agree to pay the minimum required amount of 350. You then get a pay rise (or discover that you still have lots of spare money at the month end). Rather than putting all that extra money into your savings accounts, put some of it into your mortgage, i.e. by increasing your monthly payment to 450.

P.S. One of the other answers to this article talks about credit history. When you apply for a mortgage you will be credit scored. You will need to pass the bank’s credit score conditions in order to be offered the mortgage. However, in most instances, the rate that you will be offered will NOT be dependent upon your credit score. The credit score is usually just used to assess whether to offer you a mortgage, not what rate to set.