Are you a high net worth individual with a £700K, £800K, £900K, £1 Million+ large mortgage coming up for renewal within the next year to two years? If the answer is yes, then you are one of the 1.8 million people expected to come off their fixed rate deal. For several years, you might have been enjoying the benefit of a low fixed rate of 1, 2, or 3% however, in recent months mortgage rates have increased significantly. At the time of writing this blog, the average 2-year fixed deal is at 6.55% and the average 5-year fixed deal is 6.43%.
To put that into perspective, if you secured a £1 million mortgage on a repayment basis over 30 years at a rate of 3% two years ago, you would have been paying £4,216 a month on your mortgage or £101,184 over the two years. When that mortgage comes up for renewal at the end of the 2-year period, you could potentially have a rate of 6.55% or more if rates increase, depending on how late you leave it. That means your payment could go up to £6,354 a month, or £152,496 over the next 2 years. Or £51,312 extra over the two years!
How To Save Money On Large Mortgages
So how can you avoid paying so much extra on your mortgage with the help of a specialist high loan and high net worth mortgage advisor? Being based in Southwest London, large mortgage loans are our specialty at Oportfolio, and we always want to make sure our clients are getting the most out of their investments. A lot of our clients with large loans are coming up for renewal within the next 6, 12, 18 months and we are now helping them to explore their options with remortgaging and product transfers to save them money. Below are a few options that we have been exploring with our clients:
Interest-Only Or Part & Part Mortgage
The above example was calculated on a capital repayment basis, so you pay back the loan per month with added interest on top. However, for high-net-worth individuals and high mortgage loans, this is not always the only option. Many of our clients have opted to take their larger mortgage loans on either an interest-only basis or a part interest, part repayment basis.
For a completely interest-only mortgage, you would not actually pay off any of the loan per month. You would only pay the interest on the loan. This can significantly reduce your monthly commitment payment and can save you a lot of money. The downside is of course that you aren’t paying back any of the money that you owe, but this can be just for a short period of time. Meaning that you could have your mortgage on an interest-only basis for 2 or 5 years until rates stabilise again and drop and then you can speak to us again to get you back on to a competitive repayment mortgage.
If you decide to go for a part and part mortgage, you can literally get the best of both worlds for your large loan. You can choose to have part of the loan on an interest-only basis (often a large part) and the other part on capital repayment, again significantly reducing your monthly mortgage commitment and saving you a large amount of money.
What Could The Figures Look Like For Interest-Only and Part & Part Mortgages
If we use the same figures as before, let’s have a look at what you could pay per month on an interest-only basis. £1 million mortgage over 30 years on a 2-year fixed rate at a 6.55% average interest rate would work out to £5,458 a month. £896 a month cheaper than if you were doing purely capital repayment and saving you £21,504 over the two years. If you were choosing to do a part and part mortgage, you might decide to put £700K on interest-only and £300K on capital repayment. Using the same figures, you could end up paying £3,821 on the interest-only part and £1,906 on the capital repayment part. So, in total you would pay £5,727 in total, saving you £627 a month, saving you £15,048 over the two years.
Tracker Mortgage For Large Loans
A tracker mortgage is an alternative to fixing your mortgage and has often been overlooked as a beneficial option in previous years. However, since rates have risen, tracker mortgages have become more prominent in the market as people explore their remortgage options. A tracker mortgage is a type of mortgage that follows the Bank of England’s base rate rather than sticking to a fixed rate offered by your lender. If you decide to get a tracker mortgage, your mortgage repayments and the interest you pay could change from month to month.
What Could The Figures Look Like?
The lender will normally set a differential that you will pay on top of the base rate which won’t change so for example, for a 75% 2-year tracker mortgage with Santander, they currently offer a 2.19% differential on top of the base rate. Some lenders offer an introductory rate for new customers which is often lower than the normal differential which could save you money in the long run. The base rate at the time of writing this blog is 2.25% meaning that your payable rate would be 4.44%. If we use the same figures as above, that means you would only pay £5,031 a month initially compared to a potential £6,034 with a fixed rate.
However, as mentioned, this interest rate can go up and down depending on the Bank of England base rate. And if things continue the way they have been, people predict the base rate to potentially reach 5.5% by July 2023 meaning that your total payable rate could go up to 7.69% or £7,123 a month. But no one can accurately predict how the economic plan of the BOE will pan out and we could see interest rates reducing quicker than predicted, if inflation comes under control. If and when the base rate comes back down, you could end up paying a lot less per month.
Offset Your Large Loan Mortgage With Savings
A lot of people don’t know how an offset mortgage works, let alone even heard of one. However, for larger loan mortgages and high-net-worth individuals, they can be extremely beneficial to save money on your property finance. This is how an offset mortgage works.
An offset mortgage is linked directly to one of your savings accounts. The money in your savings isn’t used to pay off your mortgage but it is used to lower the total interest you’ll be charged on your repayments each month. Lenders deduct the amount in your savings account from how much you owe on your mortgage. You’ll only pay interest on what’s left. This means you will pay less interest than if you had a repayment mortgage. The downside is that you won’t earn any interest on those savings your mortgage is offset against.
What Could The Figures Look Like?
So, for example, if you had a £1 million mortgage and £200,000 (20%) in savings, you could offset £200,000 against your mortgage meaning that you would only be charged interest on the £800,000 remaining. So, if your interest rates were at 6.55% over 30 years (most offset mortgage products are less than this) then you could pay £5,083 a month or potentially less.
Remortgage Early To Avoid Rate Rises
The final tip we have for saving money is of course, act sooner rather than later because we don’t know how high interest rates could potentially go. The absolute best thing you could do to ensure your monthly mortgage payments don’t get too high is to get in contact with us at Oportfolio mortgages to discuss your options.
Rates are changing on a daily basis in some cases and delaying re-structuring your loan can significantly impact your payments. The average rate at the moment for a 2-year product is 6.55% however the rate could be completely different in a weeks’ time. Getting on top of your mortgage is the smart move and we are here to help you find the best solution to ensure your money and your property is protected.