Save Money On Your Mortgage After It Begins - Step 2

Note: One of the best ways to save money on your mortgage is to repay a lump sum when you have any spare cash available. But there are certain dangers that you need to know about.

Repay A Lump Sum

The more money that you owe and the longer that you owe it for, the more you’ll be charged in interest. So why not save money on your mortgage by paying it off as soon as possible. This can be done by repaying chunks of it when you’ve spare cash available, or increasing the size of your monthly repayments.

Consider using any money that you have available to pay off all or part of your mortgage early. In most cases it’s better than leaving it languishing in a low interest deposit account, or worse still, spending it.

This method will allow you to use your money more effectively provided that the interest rate on your mortgage is higher than the return you’re getting on your savings. But before you start throwing every cent at your mortgage, let me say a few things.

1) It’s always a good idea to have an emergency source of cash that can be accessed immediately. Ideally, this should cover at least three months salary. It will give you some breathing space if you have some large, unexpected expenses or your source of income ends abruptly. Rather conveniently, some lenders will allow you to reclaim any overpayments if you need an emergency source of capital. So that facility could act as your emergency fund!

2) Only use your savings to repay chunks of your mortgage if you’ve no other debt that charges a higher rate of interest. Provided you’re up to date with your mortgage repayments, your savings would be more effectively used to pay off high interest sources of debt, such as store cards and credit cards. It will save you more interest than using it to reduce the amount of your mortgage.

3) Before you repay a lump sum check that your lender will not impose any penalties for paying off part of your debt early. Early repayment penalties are most likely to exist if you have a special mortgage deal, such as a fixed rate or a discount rate. However, most lenders will allow you to make one-off capital repayments of up to 10% of the original debt each year without penalty (even if you have a special deal). But check first!

4) Make sure that any extra payment made will be credited to your account as soon as possible. Ideally, the balance of your mortgage account should be recalculated daily so that the amount of interest charged on the outstanding debt will be reduced as soon as a lump sum payment is made.

These days it’s standard practice for lenders to recalculate mortgage balances daily. But it’s not long since it was common practice for lenders to credit payments ANNUALLY. They would store up all your payments for the year and only credit them against the debt at the end of the year. All the time you’d be charged interest on the part of the debt that you had already paid. In effect you were giving your lender an interest free loan for a period of up to 12 months!

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