In light of recent financial shifts, many homeowners are contemplating whether they should reduce their mortgage. The decision is influenced by various economic factors, particularly the interest rate cuts by the Bank of England, which reduced rates to 5% on 1 August 2024. This marks a shift following 14 consecutive rate hikes over the past four years. With this change, homeowners, especially those with significant mortgages, are considering ways to decrease their outstanding mortgage balance. Lowering the loan-to-value ratio could be an effective strategy to mitigate the impact of future financial pressures.
One method of reducing a mortgage is to utilise any extra income, such as a pay rise or bonus. This can reduce the amount of interest payable over the life of the loan. Another option is to reassess your investments. If these investments or savings are not yielding returns that surpass the interest on your mortgage, it may be wise to allocate them towards reducing the mortgage. However, professional financial advice should be sought before liquidating any investments, and it’s important to maintain an accessible savings buffer. Additionally, those who have recently inherited money might consider using part of it to pay down their mortgage, saving on future interest, particularly if rates stay elevated or rise again.
Reducing your mortgage can offer several benefits, including increased financial stability. Lowering the mortgage balance can buffer against potential future interest rate hikes or a prolonged period of higher rates. It can also improve your loan-to-value ratio, potentially leading to better borrowing terms, such as lower interest rates in the future. Moreover, paying off part of your mortgage provides peace of mind, as it moves you closer to owning your home outright and boosts your sense of financial security.
James Glover, Head of Regulated Lending at Arbuthnot Latham, commented on the current landscape. He noted that while the recent rate cut by the Bank of England was welcomed by homeowners, interest rates remain high. Consequently, many are seeking ways to reduce their largest expense, the mortgage. Traditionally, remortgaging to a different lender was the primary method of reducing payments. However, with the current base rate, the interest rate differences between lenders no longer offer the savings homeowners might expect. As a result, alternative methods such as extending the mortgage term or converting part of the mortgage to interest-only are being explored.
Nonetheless, these alternatives come with their own set of challenges, such as the increased overall interest costs and the need for a clear repayment plan for any interest-only portion. For some clients, it has proven more advantageous to reassess their broader financial situation, including underperforming savings and investments, or utilising surplus income to reduce the mortgage balance, rather than altering the mortgage terms.
It’s about making the most cost-effective use of your wealth and income in today’s economy. In many cases, reducing liabilities such as a mortgage may prove more beneficial than saving for future uncertainties.
Arbuthnot Banking Group PLC (LON:ARBB), trading as Arbuthnot Latham, provides private and commercial banking products and services in the United Kingdom. Founded in 1833, Arbuthnot Banking is based in London, United Kingdom.
