10:08 AM, 17th February 2012, About 10 years ago 20
In the last month I have received letters from three of my mortgage lenders suggesting that I should make overpayments on my buy to let mortgages. Their logic is that my mortgage payments have reduced considerably due to interest rates having dropped substantially since I first took the mortgages. They are right! I’m paying less than half what I used to pay as these are base rate tracker mortgages and the base rate is now 0.5% where it used to be 5%.
That’s a 90% reduction in base rate, lovely!
Am I going to take their advice?
Am I heck as like!
If I make overpayments on those mortgages, what are my chances of ever being able to borrow at those rates again?
If you are planning to reduce your debts based on your mortgage payment having reduced considerably there is a logical way to go about it.
The starting point is to create a list of all your debts and to order them by the interest rates you are paying. For example, if you have a credit card debt you might be paying as much as 30% interest on that. You may then have bank loans which are a bit cheaper and so on. Chances are your mortgages will be your cheapest debts in terms of interest rates. That’s not to say they are all the same rate so list those in order of interest rates too.
If at all possible, raise more cheap money (low interest rates) to repay the more expensive debts first. For example, if you owe £5,000 on credit cards which you are paying 30% interest on, find out if your mortgage lender will offer you a further advance on your mortgage to pay of the more expensive debts. In other words, swap expensive debt for cheap debt wherever possible. If your mortgage lender will oblige, the interest rate is likely to be significantly lower than you are paying on your credit card and you will see your monthly interest bills reducing. The same theory goes for all other debts. You can then add these savings to the extra money you were planning to use to repay your mortgage but instead of doing that, simply pay off your more expensive debts first. As you pay off your more expensive debts you will have more and more money to continue to chip away and any other debts and you will find that you debts begin to reduce very quickly after a while.
If you do have cheap tracker mortgages then be sure to pay these off last, still following the logic of paying off those with the highest interest rates first. Do check with your mortgage lenders too before committing to over-payments as some lenders actually charge you fees if you repay more than a certain amount in a year.
It also makes sense to build up a financial reserve before you repay cheap mortgages so that if you do ever need to raise extra money you don’t end up paying more for it. Offset mortgages can also be a useful tool but if you need advice try speaking to a good mortgage broker.
It’s also important to remember that you can offset your mortgage interest on your buy to let mortgages against your rental profits. Therefore, even if your personal mortgage appears to be slightly cheaper than your buy to let mortgage it may well be worth paying down your personal mortgage before you start paying off your buy to lets. It’s well worth paying for a quick meeting with a local accountant to work the figures out for you.
I wrote a related article back in October 2010 called “What you shouldn’t do with your buy to let mortgage“. Simply click on the orange text to read that article.
My concern is that with so many of these letters going out to landlords, some will be thinking it’s a good idea to make over-payments on their mortgages without thinking things through properly. Therefore, I urge you to share this article via email, Facebook or Twitter with any other landlords you know.
Just ask yourself why these lenders are suggesting this. Could it be that any money you pay off your cheap mortgage could be loaned to a new borrower at a considerably higher price? Call me skeptical if you wish but if you are happy to trust bankers to offer advice that’s in your interests that’s obviously your choice.
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