Mortgage Freedom Day for the average UK homeowner
Today (16 April 2018) is Mortgage Freedom Day – the day on which the average UK homeowner will have earned enough to cover their mortgage payments for the whole year. But some homeowners are freer than others – are you among them?
How much of your earnings go into buying your home? If you were to spend none of your earnings at all (and survive perhaps by living off the free fruit at the office) then when would you have saved up enough for a whole year’s mortgage repayments? The answer, according to Halifax, is today: 16 April 2018, dubbed ‘Mortgage Freedom Day’. Meaning that everything you earn from today onward is your own, and that your colleagues will stop muttering about you.
The Halifax estimate is based on the average annual mortgage repayment of £8,039 and the average income of £27,7243 (after tax), so the actual day of ‘mortgage freedom’ will be probably be different for you personally (if it isn’t, congratulations: you are absolutely average). The date also varies considerably across the UK, especially between the North and South – much like spring, only in reverse. Scots and Northerners tend to see Mortgage Freedom Day arrive as early as 15 March, while London continues to shiver in the winter of mortgage repayments until mid-June. But both are better off than renters, as ‘Rental Freedom Day’ isn’t due to fall for another two weeks – and to add insult to injury, renters end up £900 a year worse off than those who are buying their home.
The perils of ‘no deal’ for homeowners
However, one of the most significant factors in mortgage freedom isn’t due to location, salary or mortgage size, but to the kind of deal you happen to be on. Broadly, the higher your interest repayments, the more you’ll end up paying (and even worse, the more of your money disappears into the ether rather than actually being invested in your home).
Mortgage holders can often end up on a poor deal when their initial mortgage deal expires. Fixed, discounted and tracker mortgages only maintain their low rates for the length of the deal period (usually 2-3 years), after which they revert to the lender’s Standard Variable Rate (SVR) which is often much higher. It is possible to remortgage to a new deal, but some mortgages lock you in (with expensive early repayment charges) for longer than the deal period, and some mortgage holders simply forget to remortgage or can’t do so due to changed circumstances.
There are an estimated two million homeowners currently repaying expensive SVR mortgages, because they either did not or could not remortgage at the end of their deal term. An SVR mortgage costs on average £4,500 more per year than the best available deals, postponing ‘Mortgage Freedom Day’ by around two months.
Planning your remortgaging strategy
So how easy is it to remortgage? This may depend on what kind of deal you are on to start with (a good rule of thumb in financial planning is that you can never plan too far ahead). Whenever you take out a mortgage, check for things like repayment penalties and lock-in periods, to make sure you won’t be forced into a costly period stuck on an SVR. Weigh any such fees up carefully against arrangement fees – it may be worth paying an extra few hundred now in order to save a few thousand later on.
In other words, every time you take out a mortgage deal you should keep one eye on the next one. Think about what will happen when this deal expires, and make sure you’ll be in the best possible position to remortgage.
It’s also important to remember that any rises in interest rates will start to move back Mortgage Freedom Day for many homeowners, and at worst could start to make their mortgage repayments unaffordable. For this reason it’s important to factor in that risk element, by either seeking out a fixed rate, allowing a safety margin (i.e. not overstretching yourself) or preferably both.
A good mortgage broker can help you find the best mortgage deals both now and in the future, to help you reach your day of mortgage freedom as early in the year as possible.
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