The CashQuestions team looks at the best ways to beat the credit crunch with your mortgage - in order of preference!

Overpay

Since September the Bank of England base rate has tumbled from 5 per cent to it's current 2 per cent. This is its lowest point since 1951. Falling interest rates is great news for homeowners on base rate tracker mortgages as they mirror cuts immediately and automatically. For example, if you are paying 1 per cent over base on your tracker loan, the monthly repayment on a 25-year mortgage of £100,000 would have tumbled from £644 in September to £477 in December - that's a saving of £167 a month for doing nothing. 

But if you are lucky enough to be on a tracker and find you have some extra cash in your pocket, don't spend it! Remember that your stated monthly mortgage repayment is a minimum and that most lenders allow penalty-free overpayments on the proviso they do not exceed 10 per cent of the original mortgage debt each year.

So, instead, keep your repayment at the same level which, using the above example, will effectively mean you are overpaying by £167 a month. If you do this for the duration of the mortgage, you would pay it off 8.5 years early and save a staggering £15,373 in interest. Not only are you saving money, but you are getting out of debt quicker which, in uncertain economic times, is always the best place to be.

Borrowers paying their lender's Standard Variable Rate (SVR) - or a discount from its SVR - will have also benefitted from recent rate cuts, though not all lenders have passed every cut on in full.

Read more about the latest base rate cut here.

Save

Regardless of the twists and turns of the economy, it’s always been the case that the bigger deposit you can muster together when buying your first home, the better. This is because mortgage lenders want to lend to responsible borrowers who pose as little risk as possible and, in their eyes, the fact that you have saved is proof of this. Lenders also feel that, if a borrower has a stake in the property too, they will be less likely to default on the part of the home they have a mortgage against.

But, since the availability of mortgage funding started to disappear as a result of the credit crunch, lenders are insisting on even bigger deposits which means first-time buyers will have to save even harder. According to research from information service, mform.co.uk, mortgage lenders required an average 15 per cent deposit in 2007 but this has risen to a staggering 23 per cent of the property value in 2008.

But having a more substantial deposit will suit you as well as the mortgage lender. Not only will you have a lower debt secured against your home, you will have access to a wider variety of different mortgage lenders and to deals with lower interest rates.

Meet your credit report

Your credit report holds years’ worth of information about your borrowing history and is therefore a good indicator of how reliable you are when it comes to repaying your debt. When you apply for a loan, a lender will look at this file to decide whether to agree the loan. It figures then that, post credit crunch, your credit file is of more importance than ever.

Credit files are held (but not determined) by credit reference agencies; Experian, Equifax and Callcredit. You can apply online, on the phone or by post from any of these agencies for as little as £2. Or you can opt for a 30-day free trial of online access to your credit report at Experian. 

Get on the inside of lenders’ sums

A little insight into how mortgage lenders do their sums can go a long way. Although the credit crunch has meant that 100 per cent mortgages (that do not require a deposit), are no longer available, if you are debt-free, you can maximise your borrowing capacity by using a lender that employs affordability criteria rather than straightforward income multiples.

This means the lender will consider your monthly outgoings to calculate what you can afford to repay each month rather than just multiplying your salary by a certain amount. If your outgoings are low, you will be able to borrow more. Lenders that work on this basis include Standard Life and Abbey.

Use a mortgage broker

The credit crunch has made it very difficult for the uninitiated to find the right lender and mortgage deal for their circumstances, in which case a good mortgage broker or Independent Financial Adviser (IFA) can be invaluable. There are some mortgage brokers that do not charge consumers, taking the fee from the mortgage lender they introduce your business to instead. But bear in mind they will still need to be paid from somewhere so this cost will probably be factored into your mortgage.

Plan ahead

Most lenders allow you to ‘book’ a rate from their current range of mortgages up to three months in advance of your remortgage at no charge and without tying you into the deal. This means if rates drop again you can abandon what you have booked and opt for a different deal. Or you can up sticks and change lenders altogether…

Rent out a room

According to research from Abbey Mortgages more than 18.2 million homeowners have at least one uninhabited spare bedroom which, at an average monthly asking price of £289 per month, could generate an extra £3,468 a year – a sum that could easily tide you over the credit crunch.

In addition, the government allows each homeowner to receive up to £4,250 tax-free gross rental income a year under its Rent-a Room scheme, which means most people would not even pay tax on this income. Director of Abbey Mortgages, Phil Cliff, commented: ‘With income being squeezed in so many ways, those looking to raise some extra money may find that freeing up their spare room could provide the answer.’

Make a temporary switch to interest-only

You can reduce your monthly payments in the short term by switching to an interest-only deal. This means that, rather than paying the capital and interest with what’s called a ‘repayment mortgage’ you ignore the capital of the loan and just pay the interest due to the lender. On a £200,000 mortgage taken over 25 years priced at 6.5%, this would see your monthly repayment fall from £1,350 to £1,083.

However, while your monthly outgoings will be reduced by £267, this should not be considered as a ‘saving’. The original capital sum will stay the same and the longer it takes to pay off, the more interest will be charged on it. Therefore, paying just the interest will cost you more in the long term – but in the short-term, it could be a big relief. Look at the difference in payments with the CashQuestions calculator.

Extend the term of your mortgage

Continuing to repay the capital and interest on your mortgage, but extending the term, will also reduce your monthly repayment. For example, the same £1,350 payable on a £200,000 repayment mortgage taken over 25 years would cost £1,264 if it was taken over 30 years. But again, this should not be considered a saving as paying any debt over a longer period will result in more interest.

Take a payment break

If you are not entitled to a mortgage holiday, you may still be granted one if you can prove to your lender that your money troubles are only temporary. For example, perhaps you are in line for a pay increase or one partner is returning to work again after having a baby. In this case you mortgage lender may agree to defer any interest payments – which, at the start of a loan, account for most of the repayments – for a short period and treat the arrears as part of the original debt. Read about the Government's new three-month holiday scheme here.

Seek independent help

Of your money worries are serious it’s a good idea to seek unbiased and independent advice. There are many organizations that you can turn to including Credit Action and the Consumer Credit Counselling Service. Their debt advisers can assess your situation and devise the best course of action for you.

Beware of sale and rent back schemes

Sale and Rent Back is the name given to a type of scheme that will buy your property if you are financially struggling – and then rent it back out to you. In stress-fuelled times of a credit crunch, this can seem appealing at first glance as a homeowner can remain living in the property, albeit as a tenant, which spares you the emotional turmoil of quitting a family or marital home. It will also mean you can avoid the trauma of repossession or even putting your home up for sale in market that smacks of tumbleweed. Sale and Rent Back scheme providers also claim that you can get your hands on the cash quickly.

But Sale and Rent Back schemes are dangerous territory no matter how serious your money worries. Not only will you take a big hit on the amount you are paid for your home, the industry is not regulated by the Financial Services Authority. This means there are lots of cowboys out there that, as the new landlord of your home, could turf you out on the street anyway.

Consider equity release

If you are aged 50 or over and finding that, while your property is worth more than you ever imagined, you are struggling with the rising costs of day-to-day living, you may want to consider an equity release scheme. This means handing over part of your home to a specialist provider in exchange for cash or an income stream.  The most popular way of doing this is with a lifetime mortgage which involves taking a loan against the value of part of your home. A fixed interest on the debt rolls up until the house is sold when you die or move into care.

Under trade body, SHIP (Safe Home Income Plan) rules, the final amount owed is guaranteed never to exceed the value of your home at the time – even if it has fallen.

It is crucial to speak to your family before carrying out an equity release scheme as it means there will be considerably less in the ‘inheritance pot’. For a list of providers of equity release, see the SHIP website or for unbiased specialist advice contact Key Retirement Solutions.

Read the CashQuestions guide to equity release here.

Don’t stick your head in the sand

If you are struggling to keep up with your repayments, you should ensure you contact your lender as soon as possible and explain the situation. If one thing’s for certain, it’s that sticking your head in the sand will only make things worse in the long term.

At the start of December 2008, the Government also pledged to help people on the precipice of losing their homes by introducing two-year ‘holiday’ from paying some, or even all, of the interest on their mortgage. This could kick in from as early as January 2009.

According to early indications, the scheme is likely to be open to homeowners with a mortgage of less than £400,000 and no more than £16,000 in savings. They will have already undergone 13 weeks of payment difficulties and will need to provide evidence of genuine economic hardship. The UK’s eight largest mortgage lenders – Nationwide, Abbey, Lloyds TSB, Northern Rock, Barclays, HBOS, RBS and HSBC – have signed up to the scheme. Together they provide 70% of the country’s mortgages. Read our news story here.

Laura Howard

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