Martin Lewis: Money Saving Expert explains how to save £54,000 on your mortgage

Martin Lewis, Money Saving Expert, 46, spoke on This Morning today about how to save on your mortgage.

The Money Saving Expert, also known as MSE for short, explained many mortgage rates are rising – meaning those with variable or tracker mortgages may end up paying more.

He explained: “The rates of new mortgage deals have increased in recent months, as they tend to move with the City’s long term predictions of interest rates.

“While less than a year ago the very cheapest two year fix (65 per cent LTV) was under one per cent, the similar cheapest deal is now around 1.35 per cent. The cheapest five year fix was 1.55 per cent it’s now 1.89 per cent. Though all have high fees.

“These rates are rising as they are effectively based on the City’s long term predictions of interest rates, and these are going up.

“Plus one recent poll of analysts had 80% of them expecting UK interest rates to go up next month, but then again since we’ve had data that pushes the opposite.

“It’s swinging all the time and that’s before we factor in Brexit uncertainty.

“Yet one thing I can say is it is definitely possible interest rates will go up in August, though not definitely definite. If they do rise, by an expected 0.25 per cent points, anyone on a variable or tracker mortgage will see their costs increase – a quarter of a percentage point rise adds about £200 a year per £100,000 of outstanding mortgage.

“This means it is worth everyone checking now if you can slash costs with a new deal in case they get even pricier. This is especially important if you’re on your lender’s standard variable rate (SVR) – the default rate most fixes and trackers revert to when the intro deal ends – then the savings can be huge.

“For example someone moving a £150,000 mortgage from 4% SVR to the two-year fix at 1.35 per cent will save £4,000+ over two years even after fees.”

Some homeowners could save as much as £54,000 long term over their mortgage by switching to a fix type of mortgage.

“And over the years the saving can be huge, as Karen found: “I moved from a SVR to a fix. By keeping my monthly payments the same, I knocked 9 years off the mortgage term, saving £54,000. Thanks.”

Martin Lewis outlined his advice for those looking to save on their mortgage.

Check what your mortgage costs – and is it about to end? 

Dig out the details of your existing deal, and see if it’s worth remortgaging (ie, switching to save). You’ll need to know… 

a) What’s the rate? Plus monthly payments & outstanding debt.

b) What type is it? Fix, tracker, discount, SVR. 

c) When’s the intro deal over? Eg, when does the 2yr fix end exactly?

d) How long’s the full mortgage term? When must it be fully repaid? Eg, in 10, 15, 25 years.

e) Will I be penalised? Any early repayment/exit penalties?

Critically, work out your current loan to value (LTV) – the proportion of your property’s CURRENT value you’re borrowing. Eg, £90k on a £100k property is 90% LTV. For each 5% your LTV drops, usually until 60%, the cheaper the deal. So if your home’s increased in value since you got your mortgage, you may gain.

Benchmark your cheapest deal with a mortgage comparison

For an easy benchmark of what’s available in your circumstances, start with a comparison site that includes all deals, including ‘direct only’, those that aren’t offered by broker. These include Martin’s ‘Mortgage Comparison’ or sites such as MoneyFacts.co.uk.

Don’t just focus on rate though, the smaller your mortgage, the bigger the impact of fees. A good way to compare mortgages is to divide the fee across the discount or fixed period. So a £1,200 fee on a two-year (ie, 24-month) deal is £50 a month – then add that to the monthly repayment.  For smaller mortgages it’s worth checking if your existing mortgage provider has a cheaper deal; as it may have no fees for shifting to it.

What counts these days though, is will you be accepted. In the good/bad old days of easy credit lenders would fling out deals to all and sundry are long gone, getting accepted is now the challenge. There are two key elements to this…

• Is your credit score good enough? Your credit history is a huge part of whether you’ll be accepted for any type of credit, including a mortgage. So be careful before applying not to make too many applications for other credit, and never miss a repayment.

• Are the repayments affordable? For the past couple of years, lenders won’t just check if you can afford the monthly repayments at the current rate, but they’ll also stress test affordability if rates were 6 per cent or 7 per cent. And crucially this doesn’t only apply for new mortgages, it’s also for remortgages too (which is ridiculous and on a side note I am campaigning against this). So it’s really important you reel in your spending months before applying, as lenders will want evidence of income, big bills, expenses and even eating out.

To help match your characteristics to which mortgages are available is something a good mortgage broker can do that you can’t do yourself. But do ask if the broker will check all deals available to them and not just a panel of lenders. Also, check how much using a broker will cost and ensure you use a qualified one. For face-to-face help then ask friends for a local broker recommendation or use Unbiased or VouchedFor to find one, there are fee free brokers (they take a commission from the lender) available on the phone such as London & Country Mortgages.

Got savings? They could get you a better mortgage

For this, you need to find your current loan-to-value (LTV) – the proportion of the value of your home you’re borrowing, so £80k on a £100k property is 80 per cent LTV. At every 5 per cent LTV threshold from 95 per cent down to 60 per cent, deals tend to get better, so a little extra can have a big impact on your rate.

For example, if you’ve a £150,000 home, and want a £137,000 mortgage, that’s 91 per cent LTV, and the top five-year fix is 3.75 per cent. Yet use £2,000 of savings to reduce the borrowing, and you’d then be at 90 per cent LTV – where the top five-year fix is 2.19 per cent, saving c. £1,300/year in payments.

Fix or variable rate?

The advantage of a fix is you get price and budgeting certainty that the rate won’t move for a set time. Whereas variable deals move with the UK interest rate (and sometimes just at the provider’s whim). Generally you pay a little more to fix, but not much. Ask yourself how much you think rates will rise over the period. If safety’s what is important for you, err on the side of fixing, and fixing for longer – and right now with fixed deals being outrageously cheap this is a good time to look at it. And if you can get a long fix for not much more than a short one, that also gives you a level of certainty.