How To Cut Your Mortgage To Half

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1. Types of Mortgage: there are two types of mortgage:
Repyment and Endowment.. Both are for a fixed period, most
commonly 25 years. Payments are on a regular basis,
normally monthly.

2. The Difference: Repayment and Endowment Mortgages
differ as follows: The total amount paid to clear a
REPAYMENT MORTGAGE has two parts: the sum borrowed
and the interest on the sum borrowed. In the early years, the
major part of each payment is interest, and only a small
proportion goes towards paying off the loan. As the amount
owed decreases, more and more of each monthly payment is
used to pay off the loan capital.

An ENDOWMENT MORTGAGE is totally different. It comprises
the mortgage, and an endowment life insurance policy to
cover the amount of the loan (the insurance payments are
seperate from the mortgage payments). You pay interest on
the full amount of the loan for the full period of the mortgage.
At the end of the Endowment Mortgage your endowment life
insurance policy matures and in theory its cash value will
cover the full repayment of the loan (you are liable for any
deficit).

The endowment life insurance policy can be with or without
profits. A without profits policy should provide exactly
enough to repay the loan; a with profits policy should leave a
surplus, which is payable to the mortgagee.

A variation on the above is a low start low cost endowment
mortgage. This is essentially the same as a without profits
endowment mortgage, but initial payments are lower, and
later the payments are higher.

3. Mortgage Relief: Many people are entitled to Mortgage
Interest Relief at Source (MIRAS). At present it means that for
each œ1 of interest incurred on the first œ30,000 of your
mortgage, you only have to repay 75p (based on a basic rate
of income tax of 25p in the œ1; if the rate of income tax was
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REPAYMENT MORTGAGE REDUCTION READY RECKONER

Gross interest Repayment per œ10,000 of Loan*

All figures have been rounded up/down to the nearest œ

25 years 20 years 15 years 10 years

7.5% œ75 œ82 œ94 œ121

8% œ78 œ85 œ97 œ124

8.5% œ81 œ88 œ100 œ127

9% œ85 œ91 œ103 œ130

9.5% œ88 œ95 œ106 œ133

10% œ92 œ98 œ110 œ136

10.5% œ95 œ101 œ113 œ139

11% œ99 œ105 œ116 œ142

11.5% œ103 œ108 œ119 œ144

12% œ106 œ112 œ122 œ147

12.5% œ110 œ115 œ126 œ151

13% œ114 œ119 œ129 œ154

13.5% œ117 œ122 œ132 œ157

14% œ121 œ126 œ136 œ160

14.5% œ125 œ129 œ139 œ163

15% œ129 œ133 œ143 œ166

15.5% œ133 œ137 œ146 œ169

16% œ137 œ140 œ149 œ172
IN SUMMARY

Anyone with a Repayment or Endowment Mortgage should be
able to reduce their mortgage term dramatically by increasing
payments, ideally monthly - alternatively, yearly.

However, you must advise your lender what you propose
doing and get their agreement, and you must obtain a letter
from them which confirms that by doing X you will reduce
your mortgage term to Y years.

Great care has been taken in the preperation of this report.
However, th publishers cantake no responsibility for any
action entered into as a result of its content, and you are
strongly advised to take financial advise from an independent
professional source, e.g. not your existing lender, or another
lender. A 1991 Consumer Association report showed that in
37 instances out of 38, lenders recommended an Endowment
Mortgage when, in fact, Repayment Mortgages were the best
buy.

Incidentally, if you are wondering how such a dramatic
reduction can be made in your mortgage term simply
increasing your monthly payments by such small amounts,
here is the answer (it's what every lender knows, but never
tells a customer): by making extra payments you are helping
to reduce the whole debt, and not simply paying interest
charges.

* In normal circumstances, you will receive MIRAS relief on
the first œ30,000 of your mortgage. Thus, for as long as the
base rate of income tax is 25p in the œ, you should use an
interest rate 2.5% lower than you are actually paying when
calculating the amount on the first œ30,000 of your mortgage
only, i.e. 10% gross interest less 2.5% = 7.5%
Source: Building Societies Association.

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say 30p in the œ1, the repayment figure would be 70p).
4.Interest: For both repayment and endowment morgages the
lender calculates the interest on an annual basis. Thus, if you
borrowed œ30,000 on 31st December 1992 and made monthly
repayments of œ250 during the 12 months immediately
following, i.e. January - December 1993, the interest payable
would be based on a œ30,000 amount throughout 1993,
irrespective of the payments made during 1993. this is known
as compound interest.

5. The Real Cost of a Repayment Mortgage: You can work
out the real cost of a Repayment Mortgage by referring to the
ready reckoner later in this article. Here are some examples.
All are based on a fixed term of 25 years, at the fixed rate
shown. ALL MONTHLY PAYMENT FIGURES ARE ROUNDED
TO THE NEAREST œ.

œ30,000 Mortgage at 10% gross interest (MIRAS relief on
whole œ30,000). Monthly payment = œ225. Total amount
repaid at end of term = œ67,500.

œ30,000 Mortgage at 15% gross interest (MIRAS relief on
whole œ30,000). Monthly payment = œ330. Total amount
repaid at end of term = œ99,000.

œ60,000 Mortgage at 10% gross interest (MIRAS relief on first
œ30,000). Monthly payment = œ501. Total amount repaid at
end of term = œ150,300.

œ60,000 Mortgage at 15% gross interest (MIRAS relief on first
œ30,000). Monthly payment = œ717. Total amount repaid at
end of term = œ215,100.

œ90,000 Mortgage at 10% gross interest (MIRAS relief on first
œ30,000). Monthly payment = œ777. Total amount repaid at
end of term = œ233,100.

œ90,000 Mortgage at 15% gross interest (MIRAS relief on first
œ30,000). Monthly payment = œ1104. Total amount repaid at
end of term = œ331,200.

6. The real cost of an Endowment Policy: To work out an
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approximate figure use the following formula: a) divide the
rate of interest paid by 72. b). divide the figure obtained into
1. c). divide the figure obtained into the number of years the
mortgage has been issued for. d). Multiply the result by the
amount of mony borrowed. Thus, a œ30,000 Endowment
Mortgage, at 10% gross interest over 25 years, less MIRAS
relief at 25p in the œ = a true interest of 7.5%, thus a). 7.5%
divided by 72 = 0.104. b). 1 divided by 0.104 = 9.62. c). 25
years divided by 9.62 = 2.60. d). 2.60 x œ30,000 = œ78,000.

This means that a fixed interest Endowment Mortgage over 25
years will cost you as follows, assuming the mortgage runs
its full term. THESE FIGURES EXCLUDE YOUR ENDOWMENT
INSURANCE COVER PREMIUMS.

œ30,000 mortgage, 10% gross interest (MIRAS relief on
œ30,000). Amount required to repay Mortgage at end of term
= œ78,000

œ30,000 mortgage, 15% gross interest (MIRAS relief on
œ30,000). Amount required to repay Mortgage at end of term
= œ130,500

œ60,000 mortgage, 10% gross interest (MIRAS relief on
œ30,000). Amount required to repay Mortgage at end of term
= œ182,400.

œ60,000 mortgage, 15% gross interest (MIRAS relief on
œ30,000). Amount required to repay Mortgage at end of term
= œ286,500

œ90,000 mortgage, 10% gross interest (MIRAS refief on
œ30,000). Amount required to repay Mortgage at end of term
=286,800

œ90,000 mortgage, 15% gross interest (MIRAS relief on
œ30,000). Amount required to repay Mortgage at end of term
= œ442,500.

WAYS IN WHICH YOU CAN REDUCE YOUR MORTGAGE

So how do you go about cutting your mortgage debt in half?
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your mortgage, especially if you have taken it out in the last
two or three years. Allow for between one and three months
interest in your calculation if your mortgage rate is variable; if
it is fixed, the penelty will be much, much higher. Other hidden
costs may include a mortgage indemnity premium, a penelty
for switching your building's insurance, and an initial interest
charge (payable from the date of completion to when the first
mortgage payment is due).

ALSO, very important: you may lose some tax relief by
switching mortgages because the rules have changed over
recent years. For instance, if you are single, and share a
mortgage taken out before 1st August 1988 with someone
else, each one of you should be receiving tax relief on the
first œ30,000, e.g. a joint mortgage in seperate names would
be benefitting from tax relief worth œ60,000. However, if you
switch to a new mortgage, the total entitlement to tax relief is
œ30,000, irrespective of the mortgage size and3or the number
of borrowers. This is because since 1st August 1988, a
œ30,000 limit has applied to each property rather than each
person. Similarly, loans taken out before 6th April 1988 for
home improvements, or to buy a home for a dependent
ralative or an ex-spouse, qualified for tax relief; that benifit
cannot be transferred to a new mortgage.

Decide what you are going to do about your endowment
insurance policy. Options include continuing with the
payments, becoming paid up (this means that you lose some,
but not all of your benifits), selling it, or surrender (that way
you will get back in cash a proportion of what you have paid
in - this option is not usually worth considering unless your
policy has been in force at least five years). But don't do
anything until you have obtained impartial, and expert
professional advise.

Beale Dobie (01621 851133), Policy Plus (01225 753643),
Policy Portfolio (0181 203 7221) and Policy Register (0161
763 1919) allbuy policies. Auction houses like H. E. Foster &
Cranfield (0171 608 1941) take one third of the difference
between surrender value and sale price, plus œ50 handling
fee. Policy Network (0171 938 3626) matches up buyers and
sellers.
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allow you to switch to a Repayment Mortgage, or find another
lender who will allow you to do so.

The simplest and least costly route, is put forward by Ian
Charcol, marketing director of independent mortgage
advisers, John Charcol. Mt. Charcol says that where an
Endowment Mortgage is in place, and you want to reduce the
term, "normal advise would be to contact the endowment
company to see if it is able to reduce the policy term to
coincide with when you want the mortgage to be repaid. This,
of course, would mean them "re-quoting", based on the
policy's existing performance, and would lead to higher
premiums as a result of the shorter time period. This is
usually allowed by most insurance companies and would be
the logical step to take".

The only caveat about this advise is that you must be quite
clear in your own mind as to the new date on which you want
your mortgage to be paid up. You can't pay more some
months and not others; the end of your mortgage term must
coincide precisely with the date on which the endowment
insurance policy matures.

If the insurance company won't "play ball", your next option is
to ask your existing lender to change your mortgage from an
endowment mortgage to a repayment mortgage (but check
carefully exactly how much the change is going to cost you;
an associated consideration is what to do with your
endowment insurance policy - see below).

The alternative is to change lenders - the most expensive
option. Analyses published in November 1992 in The Daily
Telegraph, The Mail on Sunday and The Sunday Times
suggested the cost will be between œ1,000 and œ1,750. Main
considerations will be: Lender's administration fee (around
œ250); Valuation fee (œ125 upwards); Land Registry fee (œ35
upwards); Legal Fees (œ200 upwards); Sealing fee payable
for terminating your existing mortgage (about œ40) - figures
shown are minimum, the amount will vary according to the
value of your property.

IN ADDITION, you are likely to be penalised for changing
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First, we will deal with Repayment Mortgages.

All our suggestions are based on one very simple fact: pay
more than you are bound to and you will reduce your
mortgage term dramatically, and thereby slash the total
amount of money paid over to your lender.

Implementation is dependent on your lender agreeing to
receive more money from you than you are bound to pay.
Most large lenders have said they will, BUT CHECK OUT THE
SITUATION VERY CAREFULLY. If, for instance, you make
extra payments without obtaining your lender's approval and
without checking that the extra payments will reduce the
mortgage term, you may end up providing your lender with
an interest-free loan.

The reason is that unless overpayments exceed certain
thresholds, the lender neither deducts these credits from the
capital debt outstanding until the end of the lender's year, nor
does it pay any interest on overpayments during the
intervening months. Thus Halifax sets its threshold at œ250,
after which interest is credited at the same level as its
standard variable mortgage rate, while Nationwide requires
œ500 or the equivalent of three months interest. Abbey
National is the most helpful. It requires an overpayment of
only œ100 to make an immediate reduction from the capital
debt outstanding and to recalculate future payments due.

Abbey spokesman Yasmin Encer explains, "We take the view
that œ100 is a reasonable sum and it is helpful for customers
to know that if they pay off this amount or more, then they will
stop having to pay interest on it from the next day."

At the other end of the spectrum is the Cheltenham and
Gloucester Building Society which sets its threshold at
œ5,000.

To make sure you achieve your goal, write to your lender and
tell them you wish to make extra payments each month or
year - select the methord shown below which suits you best -
so that you can reduce the term; AND get them to agree in
writing when your mortgage will now be repaid based on an
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extra œX being paid per year or month, depending on which
you chose to do. In turn, there is nothing to stop you writing
to your lender and asking them by what amount you must
increase your repayments to reduce the term to, say, 15 or
10 years. Don't be frightened: you are their customer, they
make money out of you. They are (or should be) there to help
you.

Methord No. 1: The simplest methord is to make a minimum
of one extra monthly payment a year (assuming that this
payment is larger than your lender's threshold, as referred to
above). Thusif, say, you are making a payment of œ250 each
month i.e. œ3,000 a year, you make an extra payment of œ250
each 12th month, and therefore repay œ3,250 in the year.
It doesn't sound like much extra but if you had done that from
year one on a œ30,000 mortgage, taken out at a fixed gross
rate of interest of 15% less full MIRAS relief at 25p in the œ,
you would have reduced a 25 year term by about eight years.

Methord No. 2: Increase your payment by a small amount
each month; that way your mortgage term will really tumble,
e.g. œ30,000 Repayment Mortgage, 25 years (MIRAS relief on
whole amount):

Gross Payment Payment Revised Extra Amount
Fixed Required Made Length Cost of Saved
Interest Each Mortgage Monthly
Month Term Payment

10% œ225 œ246 20 years œ21 œ8,460
œ282 15 years œ57 œ16,740
œ363 10 years œ138 œ23,940

15% œ330 œ345 20 years œ15 œ16,200
œ378 15 years œ48 œ30,960
œ453 10 years œ123 œ44,640

œ60,000 Repayment Mortgage, 25 years (MIRAS refief first
œ30,000 only)

10% œ501 œ540 20 years œ39 œ20,700
œ612 15 years œ111 œ40,140
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œ771 10 years œ270 œ57,780

15% œ717 œ744 20 years œ27 œ36,540
œ807 15 years œ90 œ69,840
œ951 10 years œ234 œ100,980
œ90,000 Repayment Mortgage, 25 years (MIRAS relief on first
œ30,000 only).

10% œ777 œ834 20 years œ57 œ32,940
œ942 15 years œ165 œ63,540
œ1179 10 years œ402 œ91,620

15% œ1104 œ1143 20 years œ39 œ56,880
œ1236 15 years œ132 œ108,720
œ1449 10 years œ345 œ157,320

Method No. 3: This is an imprecise way of reducing your
mortgage term, but nevertheless one which over a million
people have passively opted for in the short term (quite
probably with no idea of the potential benifit it could bring
them if practised long term).

Who are they? People whose mortgage rate is only changed
once a year, unless they request that their payments be
reduced (or increased) to reflect base rate changes. Thus, in
November 1992, most of Halifax and Nationwide's 1.6 million
people whose mortgage repayments are officially changed
once a year, have not decreased their repayments in spite of
a 25% reduction in the amount which must be paid since the
yearly repayment rate was fixed for 1992/3. Both societies
have written to their members twice advising them of their
right to reduce payments, but report very little interest.

WHAT ABOUT ENDOWMENT MORTGAGES?

The situation on Endowment Mortgages is not clear cut. The
principle - pay more than you need to, and your total
repayments will tumble - holds good. But you cannot apply
the principle to an Endowment Mortgage unless you can
re-arrange the endowment insurance policy so that it matures
on an earlier date than agreed at the time you took out the
mortgage. Alternatively, you must get your existing lender to