A savvy 27-year-old has shared her “no-brainer” mortgage trick which could save homeowners thousands of pounds in interest.
Mortgage rates may be falling, but for many households, their home loan still takes a big chunk out of the monthly budget.
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The good news is that there’s a simple way borrowers can reduce their overall mortgage term, and therefore the total interest they’ll pay.
This is according to Chelsea Spencer, a marketing consultant from the West Midlands.
She told The Sun: “You might not realise it, but you can do this by making overpayments.
“I discovered a feature in my Monzo app – the ‘mortgage tracker.’ After playing around with it, I realised the tool could help me cut time off my total mortgage.”
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What you do need to be aware of is that by overpaying, you may not actually reduce the monthly cost – but it will reduce what you owe in total by shortening the term and the interest you end up paying.
“I’ve worked out that by making a £100 overpayment each month, I can cut two years and seven months off the term of my mortgage,” said Chelsea.
“It will also save me almost £2,000 in interest.”
Chelsea bought her three-bedroom home through the ‘Right to Buy’ scheme in 2021.
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This is a Government scheme that allows council – and some housing association – tenants in England to buy their property at a discounted rate.
“I used the scheme to purchase the home that my grandparents used to live in,” said Chelsea.
“This meant I was in the very fortunate position of not needing to save up for a massive deposit. If it wasn’t for the scheme, I don’t think I’d have been able to buy my first house this young.”
Back in December 2021, Chelsea took out a mortgage for £75,000 over a 15-year term.
This was a five-year fixed-rate deal at 1.9% with Leeds Building Society. She is now just over two years into the fixed term.
“Like so many people, I’ve really felt the effects of the cost-of-living crisis and everything getting more expensive,” said Chelsea.
“I’ve really noticed higher energy bills and having to pay so much more for my weekly food shop.
“I’m aware that my mortgage rate is currently quite low,” she added.
“I wanted to find a way to take advantage of this before I have to remortgage in three years’ time.
“I fear mortgage rates could be higher then and that my monthly payments could get more costly.”
Chelsea has been a current account customer with digital bank Monzo for eight years and was just playing around on the app when she stumbled across the mortgage tracker feature.
“I hadn’t realised that overpaying would be so straightforward, it felt like a complete no-brainer,” she said.
With the Monzo calculator, you can find out how much a regular or a one-off lump sum overpayment could save you.
You can also view your mortgage value at any time, without having to wait for your annual statement.
In addition, you can see details of your borrowing in-app regardless of who your lender is.
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Should I overpay my mortgage?
If you’re considering making overpayments to avoid future bill hikes, you need to find the balance between affordability and your desire to repay the mortgage faster.
Before rushing in, it’s important to check with your lender whether there are any fees to pay.
Typically, most banks will let you overpay by 10% of the outstanding balance each year without incurring a penalty.
But if you are in the fortunate position of having a bit of cash to spare, you need to think about whether you have any expensive credit cards or loans to pay off as a priority.
You also want to ensure you have a rainy day fund in place, in case of emergencies. This should be equivalent to between three and six months’ worth of outgoings and should be held in an easy-access account.
Once you’re happy with all of this, you can then turn your attention to overpaying your mortgage.
Chelsea said: “Another thing I love about the app is the fact I can see the progress I’m making. It’s great to see that I’ve already paid almost 10% of my mortgage, it feels like a big achievement.”
For Chelsea, the mortgage tracker hasn’t been the only tool from Monzo which has helped her manage her finances better.
“The Monzo app was also really useful when I was trying to save up for the various costs associated with actually buying a house in the first place,” she said.
“I set up a feature called “Monzo savings pots” as part of my current account, to stash money away for things such as solicitor fees and broker fees.”
With this feature from Monzo, you can keep money for important things separate from the rest of your balance – helping you to stay in control of your savings.
Customers can also “round-up” money automatically, as well as schedule regular deposits.
In just the space of just a year, Chelsea was able to tuck away a huge £4,000 with Monzo to cover her moving costs.
“As I work on commission in my job as a marketing consultant, I have fluctuating income,” she said.
“I earn around £35,000 a year, but I knew I needed to manage my money carefully to afford all the costs that come with buying a property.”
Chelsea said setting up Monzo savings pots really helped her to budget.
“By keeping these savings separate, it helped me know I had the right money to pay for all the bills that come with house-buying,” she said.
“I like being able to see my progress at a glance too. Having access to the app has made the whole process of stepping onto the property ladder – and taking out a mortgage – a lot less scary.”
Chelsea also likes the fact that she can set up a reminder to start looking for a new deal up to six months before her current deal ends.
She added: “This will ensure I don’t slip onto the standard variable rate, which I know can be costly. These are all helpful ways to save money.”
Remember that if you don’t have a Monzo account, there are other simple ways you can put money to one side.
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You can, for example, try the “cash-stuffing method” where you put physical money in envelopes each week or month.
Or, you can simply transfer cash to a savings account on a regular basis. Be sure to shop around for the best savings rates using a site such as Moneyfactscompare.co.uk.
How to get the best deal on your mortgage
IF you’re looking for a traditional type of mortgage, getting the best rates depends entirely on what’s available at any given time.
There are several ways to land the best deal.
Usually the larger the deposit you have the lower the rate you can get.
If you’re remortgaging and your loan-to-value ratio (LTV) has changed, you’ll get access to better rates than before.
Your LTV will go down if your outstanding mortgage is lower and/or your home’s value is higher.
A change to your credit score or a better salary could also help you access better rates.
And if you’re nearing the end of a fixed deal soon it’s worth looking for new deals now.
You can lock in current deals sometimes up to six months before your current deal ends.
Leaving a fixed deal early will usually come with an early exit fee, so you want to avoid this extra cost.
But depending on the cost and how much you could save by switching versus sticking, it could be worth paying to leave the deal – but compare the costs first.
To find the best deal use a mortgage comparison tool to see what’s available.
You can also go to a mortgage broker who can compare a much larger range of deals for you.
Some will charge an extra fee but there are plenty who give advice for free and get paid only on commission from the lender.
You’ll also need to factor in fees for the mortgage, though some have no fees at all.
You can add the fee – sometimes more than £1,000 – to the cost of the mortgage, but be aware that means you’ll pay interest on it and so will cost more in the long term.
You can use a mortgage calculator to see how much you could borrow.
Remember you’ll have to pass the lender’s strict eligibility criteria too, which will include affordability checks and looking at your credit file.
You may also need to provide documents such as utility bills, proof of benefits, your last three month’s payslips, passports and bank statements.
Do you have a money problem that needs sorting? Get in touch by emailing [email protected].
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