Everything you need to know about your mortgage – and how to save money on it

If you want to buy a home and can’t afford to pay for it outright, you’ll usually take out a mortgage. Here’s everything you need to know about mortgages and how to save money on them.

Very few people can afford to buy a property outright. So if they want to buy a home, they will take a loan out – usually a mortgage. Many people use mortgage brokers to find the best mortgage.

Mortgage lenders give you the money to buy a property and charge you interest. You usually pay your mortgage back in monthly instalments. If you fail to repay your mortgage and interest as agreed, your lender has the right to take your property. 

In this article, we look at what some of the mortgage terms you’ll come across mean, when it’s a good time to remortgage, how to budget for your mortgage, and how you can pay your mortgage back faster.

What mortgage terms mean

There are a number of terms that mortgage lenders use that you need to understand. You’ll see these in mortgage offers and your annual mortgage statement. Here’s what they mean.

Interest rate

this is the cost of borrowing money. When a mortgage provider lends you the money to buy your property they add a charge onto it. This is a percentage of the amount you borrowed and is called the interest rate. Obviously the lower the interest rate, the less you’ll pay.

Mortgage term

Your mortgage term is the number of years and months you will make payments for until either your mortgage is paid off (if you have a repayment mortgage) or until you need to repay the amount you borrowed (if you have an interest-only mortgage). The average length of a mortgage loan is between 25 and 30 years. 

Monthly payments

These are the payments you make to your mortgage lender each month, as agreed when you took out your mortgage. They will consist of interest payments and payments towards the principal amount you borrowed (if you have a repayment mortgage).

Fixed rate mortgage

A fixed rate mortgage is when you agree a deal with a fixed interest rate for a set period of time. This is usually two, five or 10 years. This can be a good way to manage your money as you know exactly how much you need to pay each month.

Tracker mortgage

Unlike a fixed rate mortgage, with a tracker rate mortgage your interest will rise and fall in line with another interest rate (in the UK it’s usually the Bank of England’s base rate, and in the US it’s the bond market) for a set period of time.

Arrangement fee

Many lenders charge a fee for setting up your mortgage. Arrangement fees vary in size significantly. You can usually choose to either pay your arrangement fee upfront or add it to your mortgage. If you add it to your mortgage it can cost more as you will pay interest on it. 

When is it a good time to remortgage?

Usually when you take out a mortgage you will secure a deal for a set period of time. This can be a fixed rate or a tracker mortgage. Deciding when to remortgage will therefore depend on what terms you agreed when you took out or last renewed your mortgage.

A good time to take out or renew a mortgage, or switch from a tracker mortgage to a fix rate, is when interest rates are low. This allows you to pay less for your loan overall. Many people like to fix their mortgage rate when interest rates are low.

You can use low interest rates to either reduce your monthly payments, or shorten your loan term by paying off your mortgage faster.

Three ways you can pay off your mortgage faster

The faster you can pay off your mortgage, the more money you can save and the greater peace of mind you will have. Here are three ways you can do this:

  1. Overpay each month: If you can afford to, you can overpay your mortgage each month. Over time this will chip away at the principal loan amount, reducing the amount of interest you pay overall, and potentially reducing your loan term.
  2. Make bi-weekly payments: Another strategy is to make half-payments every two weeks, rather than one monthly payment. This will result in 26 monthly payments, equal to 13 full payments. This will accelerate the payoff of your loan, and the extra payment per year can give you significant savings in total interest over the life of your loan.
  3. Use windfalls: Whenever you receive bonuses, tax refunds, or gifts, you can put them towards your mortgage to make significant progress on repaying your loan. Always check the maximum you can overpay in any set period though.

These three strategies can help you accelerate the repayment of your mortgage payoff and achieve financial freedom sooner. Always check with your lender before changing your repayments though, to understand the implications on your mortgage and ensure it will give you the results you want.

Budgeting for your mortgage

The more you can put towards paying off your mortgage each month, the faster you’ll achieve financial freedom and the less you’ll pay overall. So work out your budget carefully when taking out or renewing a mortgage.

Begin by assessing your income and existing financial commitments. Then deduct essential living expenses and allocate a portion for savings and emergencies, as well as an amount for general spending. The remaining amount can be put towards your mortgage payments. 

A well-structured budget will ensure that you meet your mortgage obligations on time and avoid financial strain. Remember to regularly review and adjust your budget as needed to accommodate any changes in your income or expenses. 

Protecting your home investment

Homeownership comes with potential risks, and having adequate protection gives you peace of mind. One important step is to take out homeowner’s insurance. This will cover damages from events like fires, storms, or theft. 

If you live in a flood-prone area, think about buying flood insurance too. If other natural disasters often occur in your area, add them to your insurance policy as well. 

To reduce costs, maintain a safe home environment and implement security measures. Regular home maintenance also prevents major repairs and helps to preserve your property’s value. Prioritising home protection protects your investment from unforeseen events and ensures that your hard-earned money is secure in the long run.

Make the most of the tax benefits of home ownership

Depending where you live, home ownership offers potential tax advantages such as mortgage interest and property tax deductions. To benefit from this you need to itemise your deductions when filing your taxes. Make sure you keep records of mortgage interest payments and property taxes paid too. 

If you made energy-efficient home improvements, you might also qualify for additional tax credits. It’s a good idea to speak to a tax professional to make sure you are taking advantage of all applicable deductions and credits. 

Look forward to a more secure future as a homeowner

We hope this article has helped you understand how to get more from your mortgage. Remember, understanding your mortgage terms is just the beginning; you need to keep making timely payments and look for wards to pay off your mortgage faster for even greater benefits.

Your home isn’t just where you live, it’s also a valuable asset that can help you achieve financial freedom.