Money: Overpay and slash the costs

MORTGAGE MAKEOVER Simon Tyler suggests how a couple could save pounds 26,000
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Jennifer Dearie and her husband, Robert, live in Eastbourne with their three sons aged 13, 11 and 7. Mr and Mrs Dearie both work as optometrists. Mr Dearie, 40, works full time and earns pounds 41,000, while Mrs Dearie, 39, works one day a week on contract and does extra work on a part-time basis, with variable hours to fit in with school hours and holidays. Her earnings vary from month to month and from year to year - in the year to April 1999, they were pounds 10,680.

The Dearies took out a 20-year mortgage in 1997 and owe pounds 100,500. The house is now worth pounds 170,000. It is repayable at 6.9 per cent until May next year, with repayments of pounds 803.47 a month.

Simon Tyler, an independent mortgage broker for Chase de Vere Mortgage Management, studied their details and suggests the family could save between pounds 8,600 and pounds 26,000 - and cut at least two years off their mortgage term.

The problem

The couple don't feel their lifestyle and income patterns suit their current deal - a fixed-rate repayment mortgage.

But if they swap to a new deal before the end of the fixed rate term, they will have to pay pounds 1,050 as a redemption penalty and the costs of remortgaging with the new lender as well, which would be up to pounds 600.

However, Mrs Dearie believes she could make better use of her earnings towards repaying the mortgage: "We would be in a position to overpay in the months when I do lots of overtime. Also, we have a few small savings schemes that will mature over the next few years [Tessas and endowment plans], so we could pay in lump sums occasionally," she adds.

The solution

The mortgage the Dearies took out in 1997 was a perfectly acceptable arrangement. However, the Halifax is less flexible about receiving extra payments and there are cheaper schemes available on the market.

Flexible mortgages give borrowers the chance to overpay every month or through lump sums - the interest is usually recalculated daily and borrowers can cut the term of their loan by several years and save many thousands in interest payments. A flexible loan lets borrowers take out cash they have already paid in and it works out much cheaper than a normal loan.

If interest rates remain at current levels, moving to a flexible mortgage now would be more expensive than waiting until the end of the fixed-rate period. But this could be outweighed by the emotional benefits of paying less interest from now onwards and potentially shortening the term of the loan by overpaying. And the Dearies could pay the pounds 1,050 penalty with some of the Halifax shares they were given as longstanding Halifax borrowers.

Chase de Vere often recommends First Active (0345 743743) for customers who want a flexible mortgage. The firm (formerly called Mortgage Trust) was one of the originators of flexible mortgages and offers a deal linked to a capped rate for the first two years.

As the Dearies want to borrow less than 75 per cent of the value of their home, this capped rate would be 5.99 per cent. There are no redemption penalties at all. At 5.99 per cent, when matching the current balance of pounds 100,500 and the current term of 18 years, their payments would be reduced from pounds 820 per month (prior to any tax relief - which is being abolished next year) to pounds 762 ; a saving of pounds 700 in the next year. More importantly, under the terms of the flexible mortgage, if they chose to pay pounds 820 per month, their mortgage would be paid off in 15 years 11 months.

This would save them two years and one month in repayments and about pounds 8,600 in interest payments. If they chose to pay an extra pounds 100 per month, the mortgage term would be slashed to 11 years and nine months (ending in February 2011) and they would save a staggering pounds 26,260 in interest.

If they prefer to pay in lump sums, they could, for example, pay off pounds 5,000 in January 2001 and a similar amount in January 2003. This would shorten their term to 14 years and save them pounds 18,690 in interest.

These assumptions do not make any allowance for drawing back any funds when required, but do demonstrate very clearly the benefits of a flexible mortgage and the ability to pay ad hoc or regular amounts at any stage and improve their financial position.

Mrs Dearie is an ideal person to take out a flexible mortgage, given the fact that her earnings fluctuate. It is often better to pay extra income into a mortgage balance rather than save it elsewhere, as long as you can obtain the money immediately from the lender if required. If you need to take out some cash, borrowing against the mortgage is much cheaper than a conventional loan.

If the couple do decide to opt for a First Active loan, they will have to pay a pounds 295 completion fee and pounds 276 valuation and application fee. First Active will pay all legal fees if you are remortgaging with them. Against this, staying with the Halifax will cost them an extra pounds 700 in cash flow payments over the next year.

The verdict

Mrs Dearie was impressed by the analysis. "We are astounded that overpaying by just pounds 100 a month can save so much in interest. It's also very appealing that we could pay off the loan by the time Stuart goes into further education.

"We will definitely be remortgaging at some stage and will consider whether it's worth paying the redemption penalty."

n Simon Tyler is managing director of Chase de Vere Mortgage Management in London.

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