5 ways to cut your mortgage costs in 2012

We show you ways to save up to £500 in 2012, some of which will snowball with no further action to save up to £5,000 by the end of your mortgage.

The start of a New Year is no special occasion in finance. 6 April is a more important date, as that is when knew tax changes announced in the Budget come into effect, and when we can use our new ISA allowance. (ISAs are tax-free savings accounts, or very low tax investment accounts.)

Yet it's a time when money is often on our minds. Hence, it's worth taking a look at ways to reduce what is, for many, the biggest household bill: your mortgage.

1. Saving £500 a year with a remortgage

With 60% of mortgage holders never re-mortgaging, Barclays estimated recently that these homeowners are wasting £1,200 per year in savings. My own estimate is a more modest £500pa, but that is still a very large sum for most of us. Some of us don't even manage to scrape that much together in savings in a 12-month period, or even put less than that away for retirement.

Ask your lender what deal it'll offer you and compare that with the rest of the market, and against your existing mortgage. I help you to decide how to choose remortgage deals in 10 things mortgage borrowers should never forget.

2. Shorten your mortgage, don't lengthen it

On average, it takes us more than 30 years to repay our mortgages. Many of us extend our mortgages when we re-mortgage, from the 23 years remaining back up to 25, for example. While this can make the monthly cost a bit more manageable, you pay for it in much greater debt interest costs, as I wrote in Avoid this expensive mortgage trap.

Instead, you should be considering enforcing more discipline on yourself. Think about reducing your mortgage whenever you re-mortgage, so that you pay it off more quickly and cheaply. If you bought in 2004 and have 18 years left, ask for quotes on a 17-year remortgage. This might save you just £15 in interest this year, while your payments might go up by a few dozen. However, the savings will grow ever faster so that, by the end of the mortgage, you should have saved more than £5,000 overall.

3. A one-off £500 overpayment saves you a fortune

Rather than reducing the mortgage length, you could take advantage of any flexibility your deal offers you to overpay without penalty. Paying an extra £500 of debt off over 2012 (perhaps the same £500 you save by remortgaging) will save you just a dozen or so pounds in interest in 2012, but thousands over the remainder of your mortgage.

If you have 20 years left and a mortgage outstanding of £120,000, you might reduce your interest this year by just £12. But even if you don't overpay ever again, the effect of that £500 will get bigger like a snowball so that you have saved £1,200 to £2,000 by the end of the mortgage, which you might pay off a year early too.

4. Cancel pointless insurances

Check that you're not paying for insurances you don't need. Many homeowners have indiscriminately been sold life insurance to protect mortgage payments, but if you have no family to fend for if you were to die young, you're probably paying unnecessary premiums.

We have also been paying for hideously overpriced mortgage payment protection insurance every month. This is supposed to protect your repayments for a year if you suffer an accident, illness or unemployment, but the premiums are usually a rip off and the contract full of exclusions. Consider either stand-alone insurance providers, who are much cheaper and usually offer slightly better terms. Better yet, build a large savings pot for the eventuality of unemployment in combination with the much better insurance called income protection. Read about that in Get £100,000 if you can't work.

5. Prioritise your mortgage

If you're having financial difficulties, it makes sense to prioritise your mortgage repayments, along with secured loans, magistrates' fines, gas and electricity, hire purchase, taxes and your TV licence. These come before other debts because you can either be imprisoned for them or you can lose your home more easily than with other debts. Losing your home is not a good way to cut your mortgage costs!

If you can't afford your mortgage even after making cutbacks elsewhere, you should immediately contact your lender. It's very clear from former debtors and debt advisers that most of the time it works out well for you to communicate openly and honestly with your creditors, and as quickly as possible. Tell your lender that you're seeking debt advice from National Debtline, CCCS (which writes a debt blog for lovemoney.com) or CAB – and do so straight away.

My final word

A mortgage is not just for 2012. Try not to get too carried away with guessing what you think will happen over the next 12 or 24 months, and plan for the long term. This will give you greater financial security. Five-year and, even better, ten-year deals are at record low rates, so if now is not the time to fix for a long period, it probably never will be.

More: Compare mortgages through lovemoney.com | The £20,000 cost of constantly switching mortgages | The ultimate mortgage if you're indecisive