Here are five effective ways in which to reduce the responsibility of having to come up with a hefty mortgage sum every month, writes Fiona Reddan

IT MAY not seem like the ideal time to pay down your mortgage but, by taking advantage of factors such as falling interest rates, you can knock years off your debt and save thousands in interest payments.

The average term of an Irish mortgage is between 20-30 years, but, for those who bought during the boom, it could be as much as 35-40 years. In terms of real money, this means that someone with a €200,000 mortgage over 20 years will end up paying the bank about €100,000 in interest payments alone. However, a boomtime purchaser with a €400,000 mortgage over 35 years will spend the same amount they have borrowed merely in servicing the mortgage over the full term - meaning that the cost of a €400,000 home is actually about €800,000 over 35 years.

So the cost benefits in reducing the life of your mortgage are clear. But how can you do it, given the tougher economic environment?

While the most obvious solution to reducing the term of your mortgage is to simply remortgage to a shorter term, this doesn't take into account changing financial circumstances, and may leave you vulnerable if your fortunes change. Moreover, even though it's unlikely in the short term, interest rates may start to rise again and increases could push borrowers to the limit each month.

The solutions outlined below are more flexible, and the over-payment options can be adjusted from month to month. Homeowners on fixed rate mortgages should note that they may have much less flexibility when it comes to making payments against their mortgage and need to check with their mortgage lender.

1 Don't reduce payments after interest rate cuts

In early October, the European Central Bank (ECB) cut interest rates by half a percentage point, its first cut since June 2003. The ECB quickly followed this with an additional half percentage point rate cut this month, bringing the rate down to 3.25 per cent, thereby cutting mortgage costs for borrowers.

With this saving already being felt as most lenders pass on the cuts to existing borrowers, the average mortgage holder can now expect to save between €100 and €300 a month.

It is likely that further rate cuts will follow shortly. While borrowers may find the savings welcome, those who could get by at the previous mortgage payment level would do well to consider keeping their repayments at that level. Remember, if the rate cut had not happened, you would not have had a choice. Borrowers can, by effectively paying more, reduce their overall interest bill and knock a couple of years off the term of their mortgage.

Savings

Take for example someone with a €200,000 mortgage over 20 years, on a tracker mortgage interest rate of 4.55 per cent.

Instead of simply using the €120 saved through the interest rate cuts for extra shopping, the borrower - by continuing to pay the amount required before the rate cuts - can save over €15,000 in interest payments over the life of the mortgage. It will also knock two and a half years - more than 10 per cent - off the term.

Downside

Borrowers looking to adopt this approach need to be on a variable or tracker rate, and need to inform their bank of their wish to keep their mortgage payment unchanged. They also need to ensure that the extra payment goes to pay down the capital part of the mortgage.

2 Sell your garden

During the property boom, developers pillaged many gardens in the leafier parts of the capital, as homeowners took advantage of the boom to earn some easy money.

Groups of neighbours can also club together to sell adjoining pieces of land to a developer. Another option is to consider selling the plot to a member of your family to enable them to get a foothold on the property market.

Savings

Depending on the size of your garden, you could earn enough to pay off the remainder of your mortgage, although whether or not you can get planning permission for the site will be key to a sale. Property Partners is currently offering a site for sale in the Woodpark Estate in Ballinteer, Dublin 16. With planning permission for a three-bedroom detached family home, the site is on the market for €250,000.

Downside

With the property market stagnant and prices continuing to fall, it may be difficult not only to get the price you are looking for, but also to find a buyer for your site.

In addition, the value of your property will decrease, while you will also have to carefully consider whether or not you will be comfortable with the proximity of the new property, and having to deal with the noise and obstruction such a development would bring.

3 Rent a room

Under the rent-a-room scheme, homeowners can earn tax-free income of up to €10,000 a year by renting out a room in their primary residence. If a couple avails of the scheme, the €10,000 limit is divided between the two parties.

For empty-nesters with plenty of spare bedrooms, it can be a useful way to generate extra income and, with the property market stagnating, finding tenants shouldn't be too difficult. There are now more people looking to rent while they wait for the market to stabilise before they buy.

According to the latest Daft Irish rental survey, room rental rates fell in Dublin city over the past three months, but across the State the rates for single rooms rose sharply, most notably in Limerick city.

The average price for a single room in Dublin city centre is now €507, while a double room can net €646 a month. In the suburbs of Galway city, homeowners can expect to earn €286 for a single room and €340 for a double.

Savings

If you earn €600 a month by renting out a room in your house and use that money to accelerate payments on your mortgage, you can dramatically decrease the term of your mortgage while also reducing interest rate payments.

If you were to use €500 a month of the rent you receive to pay down a €200,000 mortgage, you could knock almost eight years off the term while at the same time reducing interest payments by some €49,000.

Downside

The obvious downside of renting a room is that you have to share your home with someone - most likely a stranger. Moreover, depending on your proximity to public transport, retail facilities etc, it may be difficult to find a tenant.

4 Use your savings to make a lump-sum payment

While in the long term you may be able to generate a better return for your money by investing it in the stock market or an equivalent, current events show that there is always an element of risk attached to such an investment. Homeowners with significant savings should consider using part of these savings to pay down their mortgage.

Savings

Depending on how far into a mortgage you are, a €10,000 payment on a €200,000 mortgage over 25 years can lead to interest payment savings of about €23,500, while also bringing the term of the loan down by about 2.75 years, which also means that the borrower won't have to make monthly repayments during this period, leading to extra savings.

Downside

Depending on your choice of investment and market events, there is an opportunity cost in using your savings to pay down your mortgage. You could earn significantly more by investing your savings, although it can be riskier.

Factoring in the benefits of compound interest based on an annual deposit rate of 6 per cent means that, at the end of 25 years, an investor could expect to receive about €31,000.

Also, using your savings to pay off your mortgage is very illiquid. If you turn out to need access to a similar sum of money in future, you may have to borrow it by remortgaging and releasing equity - rather than just simply cashing in your investment.

5 Make one extra mortgage payment every year

One of the simplest ways of reducing the term of your mortgage is to overpay by one monthly payment each year. You can do this in one of two ways. Firstly, you can instruct your mortgage provider to simply take two payments instead of one in a particular month - in the spring or autumn may make most sense, rather than at a time of year when you're most likely to be cash-strapped, such as at Christmas or in the summer.

You will need to be clear that the over-payment will be used to pay off the principal of the mortgage loan.

The other method - a common tool used in the US - requires the borrower to make a payment every 14 days, rather than every month.

Over the course of a year, paying more frequently means that you actually end up making one extra payment.

Savings

Take again the example of someone with a €200,000 mortgage over 20 years, on a tracker mortgage interest rate of 4.55 per cent. By making just one extra payment a year, the homeowner can reduce the term of their mortgage by 2.25 years, and make interest savings of about €13,000.

Downside

Depending on your circumstances, it may prove difficult to make a double payment one month, or to make a payment every 14 days. Moreover, while a double payment may suit you one year, life can be full of surprises and you may not have the means to do so the following year, which reduces its overall effectiveness.

Also, lenders may not be accommodating if you seek to make mortgage repayments on a fortnightly basis.