Strategic attack on the capital

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The Independent Online
IT USED to be a sort of macho game. Mortgage money was dirt cheap, especially after tax relief. Interest rates were often lower than the rate of inflation. You loaded yourself up with as much debt as the lender would allow, confident that in a few years' time your property would shoot up and give you a big profit.

Today things are different. Mortgagees are being squeezed by nearly pounds 50 extra per month compared with repayment levels in April last year, and worse could be on the way. Mortgage money is no longer cheap.

People can take action to reduce their exposure, however. Many do not realise they can save thousands of pounds by paying off mortgage capital ahead of schedule. With tax relief on eligible mortgage interest now reduced to just 15 per cent, early repayment of capital makes sense - pounds 5,000 left in a building society at 5 per cent will earn pounds 250 a year, or pounds 187.50 after 25 per cent tax. If that pounds 5,000 were used to pay off part of a mortgage at the current standard rate of 8.35 per cent net, annual repayments would fall by pounds 417.

Borrowers may opt to reduce the term of the loan or the size of monthly repayments. Early capital repayment is possible with repayment and endowment mortgages, although in the case of endowments it would mainly be of use to those seeking extra bonuses from their endowments at the end of the term.

If you do want to pay off part of your mortgage, it's not always straightforward, unless you have a standard variable rate loan. Lenders offering mortgages at fixed or discount rates penalise early repayment of capital, not only during the term of the fix or discount, often up to five years, but also in an ensuing penalty period. (National & Provincial is one of the few which allow limited capital repayment during the life of fixed-rate and discount mortgages. Payments can be made of up to pounds 1,000 a year, on a yearly or monthly basis.)

With this in mind, John Charcol, the mortgage adviser, has launched fixed-rate and discount products that offer greater flexibility as well as competitive rates. The two-year discount mortgage at 5.55 per cent, which includes a 2.95 per cent discount, allows for repayment of up to 20 per cent of the original advance, without penalty, in each of the first two years. The two-year fix, at 5.95 per cent, permits repayment of up to 50 per cent of the loan each year, from the beginning of year three. Ian Darby, marketing director of John Charcol, said: "This sort of product will be especially useful for borrowers who have part of their salaries paid in commission, or those with profit-related pay or bonuses awarded at certain times of the year. People with Tessas maturing in January could put their money to good use repaying capital against these mortgages."

The Yorkshire Bank's Flexible Payment Mortgage has a radical approach. Maximum term is 25 years, but customers are encouraged to scale up repayments annually by 1.5 per cent. This, the bank calculates, will save more than six years and pounds 19,000 on a pounds 50,000 mortgage. Borrowers may also reduce payments if they hit a bad patch.

Yorkshire also offers a choice of weekly instead of monthly payments, so customers, in effect, pay a 13-month year. This can reduce a pounds 50,000, 25-year mortgage by nine years and three months, and save nearly pounds 29,000 in interest at current rates. The snag is that there are no tempting discounts or low fixes at the start - all mortgage loans are at the standard variable rate.

As a general rule, borrowers who wish to pay off bits of their mortgage early should make sure the lender realises this is their intention. Unidentified sums will otherwise be kept on the account simply as an advance on repayments, and customers will not be credited with interest on them until the end of the lender's financial year.

Lenders have varying criteria for treating extra payments as immediate reductions in mortgage debt, and recalculating the interest due. Cheltenham & Gloucester may charge to credit sums less than pounds 1,000. Alliance & Leicester and Woolwich ask for minimum payments of pounds 500. Nationwide wants pounds 500 or three times monthly payments. Leeds Permanent has a pounds 100 minimum.

Halifax does not ask for a fixed amount. "We don't recommend paying back less than pounds 500 at a time, though," a spokeswoman said. "Under pounds 500 it takes pennies off monthly repayments; over that it starts taking away pounds. Borrowers are often better off putting their money into a savings account, until they can muster that sort of sum."

One thing to check is the date the money is credited against the capital. Halifax, Leeds and Alliance & Leicester credit the same day and recalculate interest payments from that point. At Nationwide, however, the money only goes in at the end of the month; Cheltenham & Gloucester waits until the beginning of the following month.

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