Avoid hefty mortgages by cutting out your daily cappuccino

Homeowners should take immediate action and make small overpayments to their mortgages in order to maintain a healthy loan-to-value (LTV) ratio, experts advise.

David Kuo, head of personal finance at Fool.co.uk, said: "The toxic cocktail of easing property prices and tougher lending criteria means that homeowners must act now to avoid ugly mortgage deals when their current arrangements end.

"A modest fall in house prices means that small overpayments of £3 a day will be enough to reduce the loan-to value to 90 per cent.

"This is equivalent to giving up a store-bought cappuccino every day."

Fool.co.uk warns that if you are borrowing more than 90 per cent of the value of a property, you may be forced to go on to standard variable rate mortgages.

If house prices stay stable, homeowners that started with 100 per cent mortgages will reduce their loans to 90 per cent of the property value after five years.

But if property prices fall five per cent, the outstanding loans will still be 93 per cent of the value of the home after five years, which is above the 90 per cent threshold for preferable mortgage deals.

If prices drop ten per cent, it will take eight years to reach 90 per cent LTV, and 11 years if property values slump 20 per cent.

In this case, Mr Kuo advises consumers calculate the bare essentials, and eliminate everything else.

"If your resolve weakens, just ask yourself if it's more relaxing paying to watch repeats on cable television or knowing that you can afford to pay your mortgage" he said.

Nationwide's figures latest figures reported a 2.5 per cent slide in house prices. At seven months, it is also the UK's longest consecutive period of monthly falls since 1992.

Mortgages News posted on 29/05/2008 16:21:42