How to make savings on mortgage payments - Martin Lewis

UK interest rates are at a 325-year low, at 0.1 per cent. In  normal times that’d mean super-cheap mortgages, yet we don’t live in normal times.

How to save money on mortgages

Lenders have toughened up their acceptance criteria, so rates are cheap, but tough to get. And many are struggling to pay, so the regulator has confirmed another three-month extension to mortgage payment holidays.

All in all, there’s a lot to think about, but get it right and savings could be huge…

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On 4 June, the Financial Conduct Authority’s new rules came into play that extend mortgage payment holidays. Mortgage holders who haven’t yet applied for a payment holiday have until 31 October. The application deadline was 20 June, but that’s now been extended to 31 October. The ban on repossessions has been extended until this date too. Mortgage holders already on a payment holiday should be able to extend it for a further three months.

If you can’t start making payments on your mortgage once your initial deferral comes to an end, you can ask to extend it or have a partial payment holiday. If the lender thinks this would land you in financial difficulty, it’ll be able to deny the payment holiday but should offer other help. Only take a mortgage holiday if you really need it.

A mortgage holiday only defers your payments. You still have to catch up later, and crucially interest still accrues during the payment holiday. That means once you start repaying, you’ll pay more than you were.

Plus, when mortgage payment holidays were first announced, a big play was made of the fact it won’t go on your credit file. That’s still true, but it can still affect your ability to get future credit.

Lenders can look at other factors such as open banking or your payment history to see you’ve had a payment holiday – what’s still open to question is how much it’ll impact your ability to get future deals.

If you’re really struggling with finances, then do take a mortgage payment holiday, both to help cashflow and because if you ended up missing payments without agreeing a holiday it’ll destroy your ability to get a future cheap mortgage.

If you don’t need it, don’t do it – it’s not worth it. You can also minimise it and get a partial repayment holiday.

Mortgage rates are still very cheap. The big issue is to get a decent deal, or even a deal at all, you’ll need a decent chunk of equity in your house.

Those with less than 10 per cent equity, so looking for a mortgage with a Loan-To-Value (LTV) of 90 per cent or more will struggle. Yet if you do have equity there are two-year fixes from 1.14 pc if you’ve decent equity and five-year fixes from 1.35 pc.

Three steps to see if you can cut mortgage costs.

1) Ask your existing lender what its best deals are. As you’re not switching between lenders, you may not need to pay costly fees.

2) Use a whole of market comparison site to benchmark deals. Use one that includes all deals, including ‘direct only’, those that aren’t offered by a broker. These include mywww.mse.me/mortgaebestbuys. That also automatically factors in fees too.

3) Use a mortgage broker to finesse which is the best deal. What counts is not ‘what’s the cheapest mortgage’ but ‘what’s the cheapest mortgage I’ll be accepted for’. This includes affordability and credit scoring.

Right now, it’s tougher for many, as if you’re on furlough, expect them to use that as the income to calculate affordability. If you’re in one of the industries which is harder hit that can make things tough.

Yet the information about which mortgage will accept you isn’t available to the public. That’s where a good fee-free broker can help as they have that information.

Should you go for a fixed or variable rate? The advantage of a fix is you get certainty that the rate won’t move for a set time.

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.

Martin Lewis, MoneySavingExpert.com.