Inv- Mortgages- Ian McKeever & Co.

We do not advise on or arrange mortgages for the purchase of homes. We do however advise on commercial loans either those being set up or where there are early repayment penalties. However the following are points that can save you money on your mortgage. The following are points worth bearing in mind. Some of those points seem obvious but they have important implications for borrowers that may be less obvious.

Everyone expects to be paid
If you arrange your own mortgage fewer people are involved and it should make it cheaper for you. If there are complications it may be worth getting advice but at least try and do it yourself.

The interest on a mortgage is not tax deductible
The gross interest must be paid for out of your net income. This means that if you spend money repaying the capital you will be better of in the future to the extent of the gross mortgage interest saved. If you put that money on deposit you will be better of in the future to the extent of the net interest earned. In most cases the saving in gross mortgage interest will be more than the net interest on the deposit. Money on deposit gives you flexibility and can be accessed if you need it, whereas money used to repay mortgage capital may no longer be accessible. If access is not important repayment of the mortgage is a good way to invest money.

Interest Only Or Repayment mortgage?
There are actually two points to consider in favour of the repayment option.

You will note that effectively the net return on repaying mortgage capital is the gross interest rate. If instead of making capital repayments on the mortgage money is invested elsewhere that money has got to earn, after tax and expenses, a higher return than the interest rate on the mortgage. That is not to say that it will not happen, but it is a difficult target to beat.

The second point in favour of a repayment mortgage is the greater flexibility. If you subsequently decide to move, you will probably want a different mortgage with a different term. It might run for 25 years from the date of the new mortgage. If you have an endowment policy maturing 25 years after the first mortgage, clearly it matures too early and therefore premiums will be unnecessarily high. You will also need to take out a new policy for the balance of the sum borrowed. A repayment mortgage avoids all this complication.

Many mortgage lenders calculate the interest based on the capital outstanding at the beginning of their accounting year.
This might seem like some technicality of little relevance to the borrower but there are two important implications of this that can save you money.

If you make a capital repayment immediately after the beginning of their accounting year, the interest you pay will on the mortgage will not be affected until the next year because the amout of loan at the beginning of the year is unaffected. You are effectively making an interest free loan of the money to the lender for a year. Therefore make sure that, if you repay any mortgage capital, you do it immediately before the end of that accounting year and not immediately after beginning of it.

It also means that the effective interest rate on a repayment mortgage in final year is virtually double the stated rate. A simple example will illustrate the point. If you owe £1,000 at the beginning of the final year and the lender charges interest at 8%, they will charge £80 in interest for the year. You will pay £90 a month and at the end of the year you will have paid off the mortgage. However the average loan over the year will only be £500, not £1000 because after 6 months you will have paid off roughly half of it. The true interest rate is therefore almost 16% not 8% because £80 is 16% of £500. This affect happens to a lesser extent in every earlier year because the interest is calculated on the sum owed at the beginning of the year and sum owed reduces as the capital is repaid. This means that the effective rate of interest is higher than that quoted. The effect in the early years is trivial, as the amount of capital repaid is small, but as the mortgage starts to reach maturity it becomes more significant. The moral of the story is that if you have a repayment mortgage, pay it off early.

Term Insurance is cheap
It is very cheap if you are young. I would recommend taking out a policy for twice the amount of the mortgage and for ten years longer than the mortgage. Insure both lives separately for the full amount. It is flexible if you separate. If you both die in an accident the extra money will be needed if you have children. If you do move it should cover your next mortgage as well. If you do not move but have children the cover will not be wasted.

Early Surrender Terms on Endowment Policies are penal
If you do decide to repay the mortgage, continue to pay the premiums on any endowment policies. Given where you are the effective investment is the current surrender value plus future premiums. There is a market in second-hand policies. People will buy them, continue to pay the premiums to maturity, and pay any capital gains tax due. They believe they are getting a good deal. If you keep the policy the proceeds will be tax-free and you get an even better deal than they would.

Alternatively if you change your mortgage, the insurer will probably be prepared to extend the term of the policy. In investment terms it is probably not as good a deal as keeping the policy going on the original terms but it is better than surrendering it.