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Is now the right time to reduce your mortgage?
Given the changing financial landscape, many homeowners are asking an important question: Should I reduce my mortgage? In this article, we provide some thoughts on ways to reduce your mortgage and highlight what this might mean for you.
Understanding the economic environment
With interest rates at a 15-year high, homeowners will be feeling the implications of higher interest rates, especially if they have large mortgages. Reducing the outstanding balance and consequently the loan-to-value ratio could be a smart move.
Ways to reduce your mortgage
- Using additional income: If you have had a recent pay raise or bonus, consider using it to reduce your mortgage. This will reduce the total amount of interest you will pay over the life of the loan.
- Revaluate your investments: If your investments or savings are not delivering returns greater than the interest you are paying on your mortgage, it might make more sense to use them to reduce your outstanding balance. Always seek professional advice before cashing in investments and never leave yourself without a safety net of instantly accessible savings.
- Inheritance: If you have recently inherited money, consider using some of it to pay down your mortgage. This can save on future interest payments, especially if rates were to go up or remain higher for an extended period.
Benefits of reducing your mortgage:
- Financial stability: By lowering your mortgage amount, you can reduce the impact of potential future interest rate hikes or the rates remaining higher for the foreseeable future.
- Improve your future interest rate: As you pay down your mortgage, your loan-to-value (LTV) ratio improves, and a lower LTV can lead to better borrowing terms (such as lower interest rates) in the future.
- Peace of mind: Having a smaller mortgage can be a relief. It is a step closer to owning your home outright and can provide a sense of financial security.
James Glover, Head of Regulated Lending at Arbuthnot Latham comments:
“We‘ve seen a meteoric rise in the Bank of England base rate, coupled with a substantial increase in the cost of living. This leaves many clients searching for ways to reduce their monthly expenditure, and generally their biggest expense will be their mortgage.
Traditionally, the easiest way to reduce mortgage payments was to remortgage to an alternative provider. However, the interest rate differential between lenders will not compensate the rise in the base rate. This means remortgaging is not yielding the reductions many would expect. We have therefore been exploring some alternative routes to lowering our clients’ monthly payments such as extending the mortgage term or converting part of the mortgage to ‘interest only’.
But both these options have additional considerations, such as paying more in interest over the term and ensuring you have a credible repayment strategy for the ‘interest only’ portion of your mortgage.
Therefore, for some clients it has proven more beneficial to explore their wider wealth and utilise underperforming savings and investments or surplus income to reduce their mortgage rather than changing the term or repayment type.
Effectively it’s about utilising your wealth and income in the most cost-effective way, and in the current economy that may be to reduce your liabilities rather than squirrel it away for a rainy day.”
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Did you know that the most common reason for a mortgage application being delayed is that the supporting documents are not provided promptly?
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This communication should be considered a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research. It is for information purposes only and does not constitute advice, a solicitation, recommendation or an offer to buy or sell any security or other investment or banking product or service. You should seek professional advice before making any investment decision. The value of investments, and the income from them can fall as well as rise, and may be affected by exchange rate fluctuations. Investors could get back less than they invest. Past performance is not a reliable indicator of future results. The tax treatment of investments depends upon individual circumstances and may be subject to change.
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