Mortgage Cycling - What It is

Richard Pettinger

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Mortgage cycling is a way home owners can use to try and pay off their mortgages early. By making extra payments and paying off your mortgage early you can save yourself many thousands of £s in interest payments.

The basic principle of mortgage cycling is to have a flexible mortgage where you are able to pay extra payments every 6 or 12 months to reduce the amount of the mortgage debt.

If you have a mortgage for £100,000 at an interest rate of 6%. You would be paying monthly payments of about £600. The total amount you would pay back on a 30 year mortgage would be £225,838. Of this £225,838, £115,838 is interest payments. In the early years of your mortgage a lot of the monthly payment is just for paying interest. You do little to reduce the actual amount of the loan. After a longer time period of paying the mortgage then a higher % of the monthly payments goes on paying the mortgage debt and less on paying interest payments

However if you were able to reduce the time period of paying back the debt. Then the total cost of the mortgage would be much lower. For example if you could pay the debt back in 20 years then the debt repayments would be only £71,943.

This is when mortgage cycling can be used to make additional payments to reduce the mortgage and pay it off early. Basically you make a commitment to pay a lump sum payment every 6 or 12 months to reduce the “principal” of your mortgage. (Principal here refers to the amount of debt that you have. ) If you have the enough disposable income to pay this extra payment on top of your regular mortgage payments then it can be very beneficial. The difficulty is when you struggle to meet these extra demands. Some mortgage advisers suggest that it can actually work out better in the long run to take out personal loans, (secured against the value of your house) yo make these payments if necessary. At first glance this doesn’t seem to make economic sense. The personal loan is likely to be at a higher rate of interest than your mortgage. However if these loans are just temporary to overcome cash flow difficulties then in the long run it can still save you money. This is because of the big savings that coming from paying off the mortgage early as illustrated in the above example.

To many this seems disadvantageous because it is risky and complicated. However if you are confident of being able to pay these loans off quickly mortgage cycling may save you money in the long term.

It also depends how keen you are to pay off your mortgage early. It is worth remembering that if you make mortgage payments of £600 a month then this may be a high % of your salary at the moment. But in 10 or 15 years, assuming inflation and real wages rise, then this £600 will become a smaller % of your income. Therefore it becomes easier to pay extra in a few years, rather than putting pressure on yourself at the start of a big mortgage.

Richard is an economics teacher in Oxford. Richard has written many articles on economics and the UK housing market. He edits a website on guide to UK Mortgages This offers advice on different types of mortgages and the latest movements in UK housing market


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