One Silver Lining For Homeowners

Amidst all the doom and gloom in the housing market, there is one silver lining - the dramatic reduction in monthly repayments on tracker mortgages.

With interest rates in the UK heading towards zero, many homeowners with tracker mortgages have benefited to the tune of hundreds of pounds per month. I was pleased to see that my repayments were down by more than 200 pounds per month , compared to the days when the BOE rate was 5.75%. But there are others who are more luckier - consider homeowners who got on to Woolwich's BBR+0.19% tracker mortgage in 2006. On a 100k mortgage, the interest cost per month is only £140.83. If the interest rate goes to zero, their interest cost (0.19%) would be a mere £15.83 per month. Can you imagine , if BOE rate goes to zero, all they would need to pay is £15.83 a month , if they are on an interest only mortgage!!!

Another benefit, which is not widely understood, is the amount of capital that gets repaid in the early years of a repayment mortgage, during low interest rate periods. As the interest cost is low, a greater proportion of the monthly repayment amount goes towards capital repayment. For example, someone on a repayment mortgage, with an interest rate of 10%, will have repaid less than 1% of the outstanding loan , after one year. If the interest rate were 5%, they will have repaid more than 2% of the loan after one year. If the rate were 2%, they will have repaid more than 3% after one year. If the BOE rate goes to zero , the lucky chaps on the Woolwich's BBR+0.19% tracker mortgage (of the repayment variety) , will have repaid more than 3.9% of the loan after year one.

If homeowners take advantage of the low interest rate period and put the extra disposable income that they now have towards making overpayments on their loan , they could shave years off their mortgage and also save thousands of pounds in the process !!!
As described in an earlier post by me:
If I overpaid on a loan of £100,000 (Interest: 6%, Term : 25 years).
Overpayment: £200 per month
Saved Amount : £41,445.73
Mortgage Term: Reduced by 10 years

Enjoy the low rates while they last and make the most of it !

Jay