Mortgage cannibals rule
With interest rates tumbling regularly and even more cuts due, there has never been a better time to pay a little extra and eat into your mortgage. Savings will surprise you
Hannibal Lecter, played by Anthony Hopkins
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FANCY engaging in a bit of cannibalism? It is not as unpleasant as it sounds and it could save a mountain of money and help you clear your mortgage in jig time.
Of course we are not talking about cooking a fellow human being and eating their flesh. We are referring to the rather unpleasant term for overpaying on your mortgage, known as cannibalising your mortgage.
Over-paying or cannibalising your mortgage is an excellent way of spending extra cash.
It may not seem like a huge difference, but it can take a surprisingly big chunk off the overall amount of money you end up paying back to the bank or building society.
And the two recent cuts in the European Central Bank's (ECB) main interest rate give homeowners the perfect opportunity to indulge in a bit of mortgage cannibalism.
The ECB cut rates from 4.25pc to 3.75pc in October and moved again this month to take the rates down to 3.25pc. Further cuts are now anticipated by economists, with most of them predicting ECB rates will fall to 2pc next year.
The upshot of this frenzy of cutting by the ECB is that homeowners on trackers and those on standard variable rates have benefitted big time.
Tracker mortgage holders automatically benefit from rate cuts, while most banks have also passed on the rate reductions to standard variable rate mortgage holders.
Each cut in ECB rates has reduced monthly repayments for those on trackers and standard variables by between €50 and €150. So the two cuts combined mean some people's repayments come down by between €100 and €300.
So, instead of paying less on your mortgage each month why not keep paying at the same level you did before the first of the two ECB cuts, with the extra money being used to overpay your mortgage?.
This will achieve two things:
- it will reduce the overall cost of the mortgage;
- and it will mean you pay off your mortgage faster.
And if you are one of the thousands who are suffering from negative equity -- where the value of your loan is greater than the value of your home -- then overpaying is a powerful way of overcoming this in a very short period of time.
You basically have two options if you want to cannibalise your mortgage: you can either make one-off lump sum payments or regular monthly overpayments.
Cannibalising your mortgage can yield astonishing savings, even for more established homeowners who have lower interest rate trackers.
We look at three examples: a new buyer, an established first-time buyer, and a couple who have a mortgage for eight years (so they are not first-time buyers).
Take the couple who are no longer first-time buyers. They bought in 2000, taking out a 30-year mortgage for €300,000.
Calculations by Frank Conway of Irish Mortgage Corporation indicate that this couple could save themselves €21,000 in interest payments and finish paying off the mortgage three years early by re-applying the last two rate cuts to their principle balance.
Just applying one of the two recent ECB cuts as a mortgage overpayment would reduce the life of the mortgage by one year and eight months and reduce the overall cost of the homeloan by €12,576.
Even established first-time buyers who are five years into the mortgage could carve up the homeloan by engaging in cannibalism.
These people, who took out a €300,000 mortgage back in 2003, have 25 years left of repayments. Re-applying the last two rate cuts as overpayments could knock four years off the life of the homeloan and save a whopping €30,000, according to Mr Conway's calculations.
If they only applied one of last the two rate reductions as overpayments they could save €15,611 and cut the life of their loan by two years.
Big gains are possible for first-time buyers too. Take a couple who took out a mortgage in November 2007 (assuming for an original mortgage amount of €300,000, 30-year term, ECB + 1pc tracker).
If they applied the last two interest rate cuts towards paying down their mortgage, they would reduce the remaining term by almost five-and-a-half years and knock €46,341 off the interest payments.
If they applied just the last interest rate cuts towards paying down their mortgage, they would reduce the remaining term by three years and the interest payments by €26,223.
Paying down a mortgage can reap huge long-term gains, with a significantly reduced mortgage interest bill.
While the current economic condition may result in fewer homeowners requiring the mortgage savings as a result of the recent cuts for day-to-day expenses, it is important that they are also aware of the enormous benefits they can achieve, Mr Conway added.
Make sure you inform your bank in writing of your instructions.
So be very clear; state the monthly amount you wish to pay, and that it is a "capital over-payment". Then check your annual mortgage statement.
Banks and building society are keen to facilitate overpayments at the moment because of the pressure on their funding arrangements from the financial crisis.
- Charlie Weston
