Knowing how to manage mortgage payments is one of the most important things to consider when purchasing a home or a property. If you do not find a way to manage your mortgage, you could be under threat of losing your home.
In this article we will go over some effective methods of how to manage your mortgage, aiming to provide you with the information you need to handle a number of potential circumstances you may find yourself in. We will look at how to manage mortgage payments if you have a change of financial situation, as well as ways of getting ahead of your mortgage by utilising overpayments. Firstly, it is important to understand what kind of mortgage would be best for you by looking at interest only mortgages as opposed to repayment mortgages.
Interest only mortgages vs repayment mortgages
The two most common ways of repaying mortgages are interest only and repayment (capital & interest). Once you have established you are definitely able to afford the mortgage repayments, it is important to consider the positives and negatives of both forms of payment and how to manage your mortgage.
Repayment mortgages are loans in which you repay the capital that you borrowed, as well as some interest every month. They are often set for 25 years, but you can go for a shorter term or a longer term depending on how much you would like to pay per month. Capital repayment mortgages are available in different types from fixed-rate mortgages in which the interest rate remains fixed, to tracker rate, discount and flexible/offset mortgages. Repayment mortgages are a great way of giving certainty in how to manage mortgage payments and ensuring the debt is fully repaid by the end of the given mortgage term. Iif you are purchasing a house to live in, as opposed to buy-to-let, then the vast majority of people will take a capital repayment mortgage. As time goes on with a capital repayment mortgage the balance will begin to switch away from being predominantly interest, more towards actually paying off your sum i.e. the capital repayment portion increases slowly as the months and years roll on.
Interest only mortgages on the other hand mean that you only pay the interest that you are being charged on a monthly basis, unless amended in future years this will be for the entire term of your loan. These payments are much lower than repayment mortgages but do mean that you will still owe your lender the original amount that was borrowed, at the end of the term. This can mean that at the end of your term you will have a very large lump sum that will need paying off. Interest only differs to repayment mortgages as you will need to make additional arrangements to pay of the overall balance at some point in the future (and certainly at the end of the given mortgage term). Once you have paid this lump sum off, you are mortgage free. There are positives and negatives for both interest only mortgages and repayment mortgages. Interest only payments are often seen as a riskier option by lenders and are more likely suitable for buyers who have a lot of initial equity and would be able to commit to paying the capital sum at the end of the term, possibly utilising large future lumpsums from investments, inheritance or making regular overpayments through out the term. Similarly, repayment mortgages are ideal for all manner of purchasers from first time buyers to people moving home. They are the most common form of mortgage repayment as they give the guarantee of full repayment by the end of the mortgage term (as long as all payments are made).
Plan your monthly budget thoroughly
One of the best ways of how to manage mortgage payments is to ensure that you have created a complete and thorough monthly budget that takes into account any incomings and outgoings, no matter how big or how small. Important things to consider when you are creating your monthly budget include:
- All Monthly Guaranteed Income
- Pre-existing Savings
- All Taxes
- Food Budget
- Insurances
- Utility Bills
- Miscellaneous Costs Including Recreation (Shopping, going out, petrol)
Once you have gone through all the potential incomings and outgoings that you’ll have each month you can then begin to plan how to manage your mortgage payments. If you realise that you are not going to have enough money to keep up with a mortgage every month, consider not borrowing until you feel comfortable enough to do so. Knowing exactly where your money is going is a great way to stay on top of your mortgage payments to always make sure you are going to be able to afford things in the future.
Handling interest rate increases
Making sure that you are prepared for the eventuality of an interest rate increase should always be considered when learning how to manage mortgage payments. Interest rates (the Bank Base Rate) for the United Kingdom are set by the Bank of England, however, lenders and banks are not obliged to follow these. Reasons that interest rates may rise include:
- Supply and Demand and appetite to lend
- Financial Climate
- Inflation & the general economy
- Risk
A way of making sure that you have taken interest rate fluctuation into account is by budgeting. If you always make sure you have money left over in your budget, a float, you will be able to dip into it if you need to,, and can cover some degree of fluctuation to your bills and mortgage payments too. Keeping up to date with interest rates and how they could potentially move is a good way of creating contingency plans. Keep an eye on budgets and financial matters announced by the government and the Bank of England to stay in the loop on how much you will have to pay. We can give advice at any time to help with this type of planning.
Dealing with reduction of income or loss of jobs
Unfortunately, due to a number of different reasons people may end up either losing a portion of their income or could end up losing their jobs altogether. Sometimes, it is hard to plan ahead for eventualities like this so actually having a plan in place can be tricky. Without having too bleak of an outlook you should always keep an eye on the ‘worst case scenario’ in situations that involve substantial sums of money, such as mortgages.
One of the best ways to ensure that you are covered in the eventuality of loss of income or job loss is to keep a rainy-day fund at the ready that you can dip into whilst looking for work. Having a sum that you can use in bad situations gives you that little bit of breathing room you will need in order to keep your mortgage afloat whilst you sort your situation out. You are not obliged to tell your lender that you have been made redundant, but if you have fallen on hard times and are going to struggle to maintain mortgage payments, it is important to keep in touch with them as they may be able to accept lower payments in the short term to help.
Another option that can sometimes be available if you lose your job is a ‘payment holiday’. This means that you will be able to put your payments on hold for a set period so you can resolve your situation. Mortgage holidays can last anywhere up to six months and should always be arranged with your mortgage providers’ agreement (please note interest usually still rolls onto the debt with a payment holiday).
When is best to overpay?
A great way of saving a large amount of money on your interest is by overpaying on your monthly mortgage payments. The best time to overpay on your mortgage is when you may have an injection of spare income, or when you have had an increase in income through your wages. You will save interest on the money that you overpay, but there is a limit to how much you can usually pay extra. This will depend on the scheme you have on the mortgage, often being 10% of the overall debt per annum.
The 10% amount is not universal and does differ depending on lenders and scheme. Also, overpayments do not always benefit you if you should you lose your job. Lenders will not always take overpayments into account in the event of job loss i.e. sometimes an ‘overpayment reserve’ may build up, but this is not always the case.
To learn more about how to manage mortgage payments, or for any further information regarding mortgages you may wish to know, get in touch with us today. We would be more than happy to help in any way that we can, and look forward to hearing from you.
Stuart
Beds 01525 877650 or Herts/Bucks 01442 252040 or Mobile 07710 770969
email: advice@sbms-online.co.uk
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up the repayments on your mortgage.
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