Thrifty Loans

It looks like 2008 is going to be a bad year for consumer debt. With UK debt at £1.35 trillion and interest payments on that debt at £93bn a year, it is mind-boggling, but how you can reduce your particular contribution to that amount?

With your mortgage, if you have some savings, it is well worthwhile exploring the possibility of an offset mortgage. In this way, instead of earning interest on your savings, they are used to offset the interest on your mortgage. For example, if you had a £130,000 mortgage and £20,000 in savings, you would only pay interest on the £110,000 difference.

This can save you a lot, and the interest you save accelerates the repayment of your mortgage. Using the example, with a Hinckley & Rugby Building Society lifetime tracker at 0.24% above base rate (making the rate currently 5.74%), you would save £48,284 in interest and complete the repayment of your 25-year loan almost five years ahead of schedule. The mortgage has an arrangement fee of £845.

Similarly, Intelligent Finance has a three-year tracker at 0.14% above base rate for a £1,499 fee.

Another way to reduce overall mortgage payments is to overpay whenever possible. You are allowed by most lenders to pay off 10% of your mortgage without penalty each year, but check before you do so. Some lenders also calculate interest on an annual basis, so any overpayment you make won’t reduce your regular payments until the next annual review date. In such circumstances, it is better to make a single lump sum payment just before review date. Again, check.

A payment of £200 over your usual amount save £36,108 and cut the mortgage by eight years three months off 25 years, based on a two-year fixed rate at 4.99% from First Direct, with a £1,498 fee.

What if you can’t pay over the regular amount each month?

You could reduce the term of your mortgage. If you took a two-year tracker from the Co-Op Bank at 0.01% below base rate, you would save £24,817 over the whole mortgage by reducing the length of the mortgage from 25 years to 20. The arrangement fee is £999.