GET INTO SHAPE FOR THE LEAN TIMES AHEAD; Experts advise cutting debts before interest rates take off.

Byline: NEIL SIMPSON

BRITAIN has gone mortgage crazy since interest rates started tumbling at the start of 2000.

The number and size of new loans has soared. And borrowers already in the housing market are remortgaging in record numbers, cashing in on rising property prices and increasing loans for everything from home improvements to expensive holidays.

But while most people can afford the interest while rates are low and they have good jobs, there are fears that a credit crunch could be around the corner if the economy takes a turn for the worse.

According to many experts, repaying debt should be a priority in these uncertain times.

Simon Jones of London-based mortgage broker Savills Private Finance says: 'With a cash windfall of [pound]1,000, it makes sense to use it to bring the mortgage down to earth.

'Paying off a loan gives you strong, guaranteed savings every month - something that is hard to find in most other savings plans or investments.'

It makes most sense to try to cut the size of a mortgage early if you have an interest-only loan and are not sure how you will repay the capital. Borrowers should also try to cut outstanding loans if they have an endowment mortgage and have been told their investment plans are unlikely to grow fast enough to cover the debt.

Making a lump-sum payment to reduce debt can be done in two ways.

The simpler path is to cut the amount of capital owed, reducing monthly interest bills. This leaves you with more cash to spend each month.

The more modern way, which can provide bigger long-term rewards, is to continue with the same monthly repayments. By effectively making even small monthly overpayments like this, you chip away at your debt and can clear the loan faster than the usual 25 years.

That's what Harry and Angela Walsh are trying to do on their home in Stockton-on-Tees, Cleveland.

Harry, 35, and Angela, 31, have a flexible mortgage with Intelligent Finance, the phone and internet arm of Halifax bank. The couple, who have two children, Hannah, 7, and Rachel, 4, had a mortgage with a High Street bank for years.

But when they wanted to borrow extra for home improvements, they spoke to an independent financial adviser who suggested a newer loan.

Harry, an electrical engineer, says: 'We borrowed enough extra money to have all our windows replaced and are still paying [pound]40 a month less interest with Intelligent Finance than we were with the bank.

'It was easy to switch lender and we are now setting our savings interest against the loan to cut the interest bill and help us to clear it years ahead of schedule.' UNFORTUNATELY, many borrowers hold back from using savings or windfalls to repay part of a mortgage in case they need the money later. But this need not be a problem.

Simon Tyler of London-based Chase de Vere Mortgage Management says: 'Most mortgages have a degree of flexibility about them now so overpayments can be withdrawn again later.

'Just check that you don't face any early redemption penalties when you pay any extra off a mortgage.'

Unlocking those loan handcuffs

USING a modest windfall to pay off a personal loan should become easier if Consumer Minister Melanie Johnson has her way.

She has announced a shake-up of consumer credit laws to bring growing levels of personal debt under control. Along with most independent analysts, the Government is worried that people are taking on too many debts without fully understanding the small print.

Johnson says: 'Consumers need a far better deal in the credit market. They also deserve better protection from lenders, which is why we have embarked on this massive overhaul of credit laws.' Among the Government's targets are confusing interest rates quoted on credit cards as well as problems with unlicensed loan sharks.

Also under attack are unfair early redemption penalties that handcuff borrowers to costly loans, even if they have the funds to clear their debts.

Financial statistics provider Moneyfacts says most personal loan companies charge one or two months' interest as a penalty if borrowers repay debts early.

Fair-play lenders that allow borrowers to clear loans at any time - and charge reasonable interest rates - include Northern Rock, Halifax-owned Intelligent Finance and American Express.

Strangely enough, the most modern personal loans - internetonly loans from the likes of abbeynational.co.uk, lombard direct.com, smile.co.uk and tesco.com - all have outdated penalties of two months' interest on early redemptions.