Shave £100,000 off your mortgage by doing... NOTHING!

Peter Parsons Surely it can't be possible? To chop 100 big ones off your mortgage without even trying? How about chopping a few years off the term of the mortgage too, all absolutely free? Sound too good to be true? Well, dear home buyer, get a load of this! We will consider the UK for the purposes of this article (although the principle is valid anywhere). First of all, let's remember that the UK property boom is now well and truly over, and prices are sliding (according to the UK's 'Land Registry', the official source for property transaction figures), and have done so for 11 months straight.

Like all booms, this one went bust, and as it is a property boom, the resultant crash appears to be in slow motion, with a 'water torture' of continuous falls, probably (if history is any lesson!) for between 5 to 7 years. Sounds nasty? Not at all. It in fact provides an opportunity for you to save yourself hundreds of thousands, and literally years off your mortgage.

The average house in the UK has now dropped back down to just below £170,000 and is heading south. So what, I hear you cry. Consider the cost of servicing a £170,000 mortgage at close to the long term UK average interest rate (we'll use 7% as an example - actually 1% comfortably BELOW long term UK interest rates!). Over 25 years, that property will cost you £1,201.52 a month, each and every month for 25 years making a total cost of £190,456 in interest. This means that after 25 years, you will own the house, and it will have cost you £360,456. Surprisingly large amount, isn't it? And here's where the REALLY interesting bit comes in.

General inflation in the UK is running at just below 3%. Assuming by some miracle that the realtor's preferred 'soft landing' (stagnation) scenario happens, that still means that over 3 years, prices will have effectively dropped by 10% or so. And what if we get 'gentle falls' - say 5% a year? That adds up to 15%. Add on general inflation, and houses in 3 years time are likely to be, under this scenario, 25% cheaper than now. If prices actually 'crash' as they usually do, in 3 years the average UK house could be a measly £110,500.

This means you have already saved £59,500 simply by not buying for 3 years. But wait, it gets better! Say you then buy the same house as before, but this time at the new reduced figure of £59,500. Lets also say you are comfortable with the payments at $1,200 or so each month. Guess what. Hard as it is to believe (and you can check this with any calculator or spreadsheet that has an 'amortization' function!), You will pay £1,202.69 each and every month for only 11 years, for an interest charge of only $48,255.08. The final cost of the house, which is yours after only 11 years, is only $158,755 and change.

Take a moment to think about that. You just saved £200,000 or so, and paid off the loan a full 12 years before someone buying an identical house today. Knock off (say) £36,000 in rent while you wait for the market to fall, and you STILL save £175,000 or so, for doing ABSOLUTELY NOTHING apart from waiting. Even if the 'soft landing' scenario somehow happens (maybe there IS a Santa Claus!!!) you still save £17,000 upfront, and only have to pay £1,200 or so per month for 18.5 years, meaning you only pay back £120,264 in interest, for a grand total of $273,264 - a saving of almost £90,000!

So. The choice is yours. Do nothing, and make a sweet £90,000 to £200,000 profit (plus pay off your mortgage between 6 and 14 years early!) or be the 'last sucker in the box', and pay the full amount! Bit of a no-brainer, really, isn't it?!

About the Author

Peter Parsons writes mortgage articles for www.mortgagedown.com , the place to get advice on how to get your mortgage down to a sensible size