Bonus time crucial for your mortgage

For many people the January payday includes annual bonuses and pay increases. Research by Charcol.co.uk shows that even the most modest overpayment to your mortgage can reduce the term and save you thousands of pounds from your debt during the term of your mortgage.

“January payday is blessed relief for many, as the costly of Christmas and a thread-bare January can be remedied by the last of the January sales. But resist the temptation to blow your bonus or pay rise, and you can do yourself a favour that will last much longer than this month.” Comments Katie Tucker of Charcol.

“You should always pay off your most expensive debts first, as these are charging you most per pound every month. Your statements will tell you what rate you are being charged; typically credit cards and store cards are highest, especially if you have taken cash on them; personal loans and second charge mortgages are normally next most expensive, then your mortgage. Student loans tend to be lowest, as they were set at 4.8% this year.

“Many people receive a 2% increase in salary in line with inflation. On a £35,000 salary this works out to around £50 extra per month after tax. If you have had a pay rise this year, but you have lived comfortably without it this long, you should seriously consider using the extra money as a regular monthly overpayment to your mortgage.”

Miss Tucker continues: “Mortgage lenders normally allow you to pay up to £500 monthly or 10% of the debt, and for most your interest will be recalculated immediately. Simply overpaying an extra £50 per month will bring a £150,000 25 year repayment mortgage down from 25 years to 22 years, and save you a whopping £17,415 on the cost of your mortgage over the term.

If you are lucky enough to receive a substantial lump sum as an annual bonus, paying off part of your mortgage could be a very sensible thing to do this year, because whilst interest rates are high, reducing your debt saves you even more on a monthly basis. If you reduce your £150,000, 25 year mortgage by £20,000 this January but keep your mortgage payments the same, you can pay off your mortgage 6 years early. The biggest savings are made if you pay in a lump sum, but don’t reduce your monthly mortgage payments. Ask your broker for an illustration of your current mortgage, and one showing the bonus paid off, or increased monthly payments.

For further information, visit charcol.co.uk.