Your Money: Cut the mortgage and save a bomb - Time is right to reduce term of home loan and slash the overall interest bill

BORROWERS may be tying themselves to an unnecessarily long stretch of mortgage payments by failing to consider a reduction in the loan term from the standard 25 years.

Average mortgage terms have lengthened in Britain - until recently, 20-year loans were considered the norm. Longer repayment periods make sense when house prices are expensive relative to earnings, and when high inflation is eating quickly into the real value of the loan. But with inflation low and house prices stable at present, it may be time to think again.

'The logical thing now might be for terms to shorten,' said Peter Williams, head of research at the Council of Mortgage Lenders. 'Certainly, people are repaying earlier.'

Vera and Michael Long of Bingley, west Yorkshire, are a good example. They have just come to the end of a two-year fixed mortgage with the Cheltenham & Gloucester and have decided to switch to another fix, this time with Northern Rock. 'We decided to take five years off the mortgage term, reducing it from 17 years to 12 years,' Mrs Long said.

'We're both 48, and we're both hoping to retire when we're about 60. It's a comforting thought that the mortgage will be paid off by then.' Their actual outgoings are likely to remain much the same, since their new fixed-rate mortgage is substantially below the old C&G's rate.

'I have never understood the reason why 25-year mortgages existed. I think people should fit their mortgage term to something they can foresee, so that they arrange to pay it off when they retire or when the kids leave home,' said Clive Miers, chairman of Miers, a mortgage adviser.

His firm has encouraged borrowers to shorten their terms by taking the sometimes substantial initial cash-back or interest discounts offered by many lenders on repayment mortgages but paying the normal payment in the first year. 'This can save the borrower thousands of pounds, by clearing the mortgage several years early. The discount comes straight off the amount of the mortgage outstanding,' Mr Miers said.

The arithmetic can certainly be revealing. A home-owner who borrows pounds 50,000 at 8.1 per cent on a 25-year repayment mortgage, for example, would have paid about pounds 57,000 extra in interest by the time the loan was repaid. Take the same loan over 20 years, and the total bill for interest falls to about pounds 44,000. The monthly payment for the 20-year mortgage is only about pounds 30 more - pounds 387 as opposed to pounds 353. (These figures are based on continuing 20 per cent tax relief, so in reality underestimate the actual payments).

The shape of the repayments curve means, in fact, that the longer the mortgage term is extended, the smaller the savings on monthly payments become. 'Once you go above about 20 years, it has very little effect on reducing payments - you just pay more interest,' said Mr Williams.

Britain's largest lender, the Halifax Building Society, says it is happy to consider requests for loans over any length below the standard 25 years.

However, a spokesman admitted that the vast majority of its borrowers with repayment mortgages automatically topped up their mortgage back to 25 years each time they moved house.

'It's worth asking: 'Can I afford, say, a 20-year mortgage?' You can benefit from thousands of pounds if you do that,' he said.

Paradoxically, Mr Miers believes that the recent rise in interest rates may encourage borrowers to reduce their mortgages more quickly - to get rid of debt - even if this means higher payments.

A number of specialist companies are now offering 'mortgage acceleration' advice on how to pay off mortgages faster and the idea may spread. 'Mortgage acceleration is a little-known subject in the UK, but in Canada, the States and Australia it's big business. Something like 60-70 per cent of mortgages in Australia have facilities for making early payments,' says Richard Lacy, chief executive of the Independent Mortgages Corporation.

But the process is relatively easy to undertake on a DIY basis. If you have an endowment- linked mortgage, one possibility is to maintain the policy to its original maturity date while paying a lump sum as capital repayment to the lender. Interest payments will continue for the full term, but at a reduced level, and more of the endowment proceeds will ultimately be yours to enjoy.

Mr Miers said a preferable route was to negotiate with the insurer to reduce the length of the endowment policy.

'All the major companies will do this, although arranging it can be a hassle,' he said. The eventual payout will be reduced to allow for the shorter contribution and investment period. (Tax rules mean that endowments must run for at least 10 years.) There may be other penalties, although these should be minor. Standard Life, for example, says it makes a pounds 40 charge for altering the term of a unit- linked policy. There is no charge for changing with-profits endowments.

Repayment mortgages are generally more straightforward. Most building societies recalculate their borrowers' accounts once a year, when payments over the previous 12 months are allocated initially against interest due; any extra is used to reduce the outstanding balance, on which the next year's interest is calculated.

(Graphs omitted)

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee