How to save £20,000 on your mortgage

By Richard Evans
How? By switching a small part of your debt to a cheap personal loan.

 Home owners can save hundreds of pounds a year by switching some of their mortgage borrowing to cheap personal loans – and reduce their overall debt by thousands of pounds at the same time.

Personal loan rates have been falling – the cheapest is now 6.3pc – as lenders engage in a price war. Some mortgages actually cost more than these cheap personal loans. But even if you are not paying such a high rate on your current mortgage, you could still save by transferring some of your debt to a personal loan.

This is how it works. If you want to remortgage or buy a home, you take out a personal loan for, say, 10pc of the property price, which means your mortgage will be a smaller proportion of the cost of your home. This will often qualify you for a better rate, as mortgage interest rates are very sensitive to what lenders call the “loan-to-value” (LTV) – your home loan amount as a percentage of the purchase price.

Imagine you want a lifetime tracker mortgage on a £300,000 property and have a 10pc (£30,000) deposit or equity. If you borrowed all £270,000 on a mortgage, your LTV would be 90pc. The best lifetime tracker at 90pc LTV, according to John Charcol, the mortgage broker, is from the HSBC and costs 4.59pc.

But if you took out a personal loan of £15,000, you would need a mortgage of just £255,000, which is an LTV of 85pc. The best lifetime tracker at 85pc, which comes from First Direct , charges 3.69pc – 0.9 of a percentage point less than the HSBC mortgage.

This makes a big difference to the repayments. Borrowing £270,000 at 4.59pc over 25 years would cost £1,531 a month, according to Ray Boulger of John Charcol. A home loan of £255,000 at 3.69pc would be £1,316 a month.
You have to add the repayments on the personal loan to this amount, of course. Consumers can borrow £15,000 for 10 years on an unsecured personal loan at a rate of 6.4pc (personal loans always charge fixed rates). The monthly repayments on this loan would be £168. The total cost of borrowing £270,000 via a £15,000 personal loan and a £255,000 mortgage is therefore £1,484 – a saving of £47 a month, or £564 a year.
Using a personal loan can also save money if you want the certainty of a fixed-rate mortgage. Using the same example of a £300,000 property and a 10pc deposit, the best five-year fix at 90pc LTV comes from the Post Office and charges 4.99pc, meaning a monthly cost of £1,595. Borrowing £15,000 on a personal loan would qualify you for an 85pc LTV mortgage; the best five-year fix here is Yorkshire Building Society’s deal at 4.24pc. This is an improvement of 0.75 of a percentage point and the monthly cost is £1,395.
Add the cost of the personal loan and the total monthly repayment comes to £1,563, which is £32 a month or £384 a year cheaper than borrowing the whole sum with a mortgage.
Better still is the effect on your total debt when the personal loan is paid off. Assuming that you can fix for the second five years at the same rate as for the first five, your outstanding debt if you borrowed the whole £270,000 on a mortgage would be £198,800 after 10 years, Mr Boulger calculated. But the remaining debt if you used a mortgage plus personal loan would be just £183,000.
So, after 10 years, the benefit of using the personal loan is £15,800 off the outstanding debt and £3,840 less in monthly repayments – a combined sum of £19,640.
Clearly, using personal loans makes sense on paper. But would you actually qualify for the loans and mortgages you would need to make it work in practice?
“Many mortgage lenders won’t mind you using a personal loan as part of your deposit, although a few will,” Mr Boulger said. “However, you must be honest about it from the start. Lenders will see any loan applications on your credit file and some recheck just before they release the money, so you wouldn’t avoid detection by getting the mortgage approved first.”
It is also important to have saved up at least some of the deposit yourself, Mr Boulger said. “Lenders are very keen for you to have some skin in the game – at least 5pc of the purchase price should be from your own money.”
Personal loan providers, meanwhile, should not object, Mr Boulger said. He pointed out that lenders might increase rates at the £15,000 level, so check the rate you are offered at £14,999 as well. You will need a top-notch credit history to qualify for the best personal loan rates and the cheapest mortgage deals.
“The best personal loan will depend on the amount borrowed,” Michelle Slade of Moneyfacts said. “A lender may be competitive in one tier, but not necessarily in another.” David Black of Defaqto, the data provider, said: “The keenest rates for unsecured loans tend to be for between £7,500 and £15,000. It is difficult to get an unsecured loan above £25,000.”
There’s yet another advantage to using a personal loan for some of your borrowing: the early repayment charges (ERCs) are normally much lower. Borrowers with the Post Office mortgage mentioned above, for example, will pay 5pc of the original amount borrowed if they pay the loan off early; the cost of redeeming a personal loan early, by contrast, is normally just one month’s interest.