Is the mortgage market turbulence getting you down? Have you got a mortgage-related question you need answering? Email in and we’ll get one of our experts to reply. Nick Mendes, mortgage technical manager at John Charcol, has given his guidance to a reader below. If you have a question for our experts, email us at [email protected].
Question: I have enough to put down a 40 per cent deposit on a £350,000 home. Is it better to pay a large a deposit as possible to get a smaller mortgage or is it in fact more beneficial to use a smaller deposit and put the rest of the money in a high interest savings account? I have found one where I can get a rate of 5.2 per cent. As the mortgage rate is 5.5 per cent, I was wondering what might be better?
Answer: It’s often worth trying to contribute the highest percentage deposit that you can. This will get you access to better mortgage interest rates, which – combined with the fact that you’ll be borrowing less – can greatly reduce the interest you’ll pay overall.
However, you need to carefully consider if your deposit money is better spent elsewhere. Similarly, when making overpayments on your mortgage, it can be a great way to lower your debt and save yourself money. Overpayments mean you can reduce the loan amount, letting you either lower your monthly payments or shorten your loan term.
But if you have a savings account earning a higher interest this could beat overpaying on the mortgage. This depends on several things including whether you are planning a one-off overpayment or if you want to overpay monthly over the mortgage term, how much your mortgage debt is, how many years you have left to repay your mortgage and whether you pay tax on savings interest.
If you have other debts, you may find it more beneficial in the long term to pay these off rather than increasing your mortgage deposit. To see whether this is relevant, you will need to compare the interest rates, loan length and any other clauses on your mortgage and other debts.
It is also often sensible to make sure that you still have a suitable emergency fund in case any problems come up.
Mortgage rates have also significantly reduced in the past few months, with Halifax, NatWest, Santander and HSBC offering sub 4 per cent fixes up to 60 per cent LTV (those with 40 per cent deposits or equity).
You may also want to consider an offset mortgage; this is when your savings are offset against (counterbalance) your mortgage to reduce the amount of interest you’re charged. Essentially the lender subtracts your savings held in a linked account from your outstanding mortgage balance at that time.
For example, if you have a mortgage of £200,000 and savings of £50,000 in a linked account, you would only be charged interest on £150,000. This arrangement can lead to substantial interest savings over the life of the mortgage, shorten the loan term, or both.
I would strongly recommend speaking with a mortgage broker can get the best deal based on your needs and circumstances, as the rate of 5.5 per cent certainly seems high in today’s market considering the deposit you are able to put down.
