If you’ve been with the same mortgage lender for several years, the chances are you may be paying much more than you need to for your home loan.
Remortgaging to a different deal could potentially save you hundreds or even thousands of pounds a year, so it’s important to review your mortgage regularly to see if better deals are available elsewhere.
Here, we explain exactly how remortgaging works and outline the potential benefits.
What is remortgaging?
Remortgaging happens when you change the mortgage you currently have on your property, either by switching it to a new lender, or by moving to a different deal with your existing lender.
The main reasons people remortgage are to save money (by securing a lower rate of interest on the debt), or because they are moving to a different property. Others remortgage to release capital (or ‘equity’) from their property to pay for things such as home improvements, or to pay off other debts.
How you can save
When we first apply for a mortgage, most of us sign up to an introductory rate for a certain period.
For those on a tight budget, this is often a fixed rate deal, which charges a fixed rate of interest for two or more years. Alternatively, there are discounted deals. These offer a discount on the lender’s standard variable rate (SVR), again for a set period. So an SVR of 5% might be discounted down to 3% for two years.
Then there are tracker deals, which track the Bank of England base rate, plus a set percentage on top. The deal might promise to charge base rate plus, say, 2% – so if the base rate were 0.5%, the rate charged to the borrower would be 2.5%.
With a capped mortgage deal, the rate will rise and fall in line with market conditions with the guarantee that it won’t exceed a certain level.
When initial deals end
The majority of initial deals such as these only last for a few years. When they expire, homeowners will usually automatically be moved onto the lender’s standard variable rate, which will typically, but not always, be higher than the rate they have previously been on.
You don’t have to settle for the standard variable rate, however, or stick with the same lender for your whole mortgage term. Provided you aren’t locked into a deal which will charge you early repayment penalties if you change, you should be free to switch to another mortgage deal whenever you want.
Doing so could save you thousands of pounds a year.
Who should/ shouldn’t remortgage?
If you are currently paying your lender’s standard variable rate, you could potentially save yourself a fortune by moving to a different deal. However, this won’t be the case for everyone, particularly those with very limited equity in their properties.
This is because the most competitive remortgage deals are usually reserved for those with at least 25% or more equity (meaning their mortgage is for less than 75% of the property’s value; if someone has a £150,000 mortgage on a house worth £300,000, they own 50% of the equity).
If you aren’t on a standard variable rate and want to leave your existing fixed, discounted or capped deal early, make sure you check what penalties are in place. If you are locked in to your current deal, then the fees for switching ahead of time could wipe out any savings you would make by moving to a deal with a lower rate of interest, which means remortgaging wouldn’t make sense.
You should also check whether there are any application fees attached to the new mortgage, and any other associated fees, such as a property valuation or survey. Again, these may obliterate any interest rate savings and eat into equity that is released by the move.
Always speak to an independent mortgage broker before remortgaging as they will be able to help you work out whether you are better off staying with your existing mortgage, or moving elsewhere.
If you are moving home and remortgaging, and you are borrowing more than your existing mortgage, you will need to check that your lender is prepared to grant you the additional amount before proceeding.
Which kind of remortgage deal should I choose?
Fixed rate mortgages
If you want to know that your monthly mortgage payments won’t change over time, a fixed rate mortgage is likely to be your best option. Most fixed rate mortgage deals run for between two and five years, although occasionally longer term deals are available.
There will usually be repayment penalties to pay if you want to come out of your fixed mortgage deal early.
Fixed rate mortgages provide valuable peace of mind that your repayments will be the same month after month. But in periods when interest rates are falling, there is a risk you might end up locked into a deal with a relatively high rate of interest when much lower rates are available elsewhere.
Capped rate mortgages
If you prefer a variable rate mortgage, but don’t want the rate to exceed a certain limit, you should consider a capped rate mortgage, where the rate cannot go higher than a certain level, or ‘cap’. This kind of deal ensures that you won’t be hit with unaffordable payments during the capped period. But note that capped rates can often be higher than the equivalent fixed rate.
Discounted mortgages, which offer a discount off a certain interest rate – usually the lender's standard variable rate – are also variable, so your payments could go up or down over time, but there is no limit on the amount they could rise by. They may therefore be cheaper initially than alternative deals, but your repayments could increase significantly during the term of your deal.
Tracker mortgages are another type of variable rate mortgage, and they usually tracks or follow the Bank of England base rate at a set margin above or below it. The amount you need to repay falls when the base rate drops, but when it rises, your repayments will also increase, which can make budgeting difficult.
Another option you might want to consider is an ‘offset’ mortgage. These work by offsetting your savings against what you owe on your mortgage, therefore reducing the overall amount of interest you pay.
So, if you have a £150,000 mortgage and £30,000 in savings, with an offset you’d only pay interest on the £120,000 difference, enabling you to pay down your mortgage more quickly. However, offset rates tend to be higher than those available on ‘standard’ mortgages, so you’ll need to do your sums carefully to ensure this kind of deal is appropriate for your needs.
And you’d obviously need to lodge your savings with the same institution providing your mortgage!
Costs and savings
There are several costs involved in remortgaging that you will need to factor in. Most mortgage deals have arrangement fees, some of which can cost £1,000 plus, so make sure you know exactly how much you’ll have to pay before signing up to a particular deal.
You will also need to pay legal and valuation costs, although some remortgage deals include these for free.
However, in most cases, the savings you will make from remortgaging will far outweigh the costs involved. To give an idea of the sort of savings which might be achievable, someone with a £150,000 mortgage paying an average standard variable rate (SVR) of 4.41% could end up £2,092.50 a year better off if they switched to a two-year fixed rate deal at 1.66%, even factoring in a £975 arrangement fee.
How to remortgage
Your first step should be to check there are no penalties to move from your existing deal. Once you have found the remortgage deal you want to move to, you will need to gather together all the information you needed when you first applied for a mortgage.
This will usually include proof of your current income, three years’ worth of accounts if you are self-employed, as well as bank statements and details of any other credit arrangements you have in place.
Your new lender will also want a valuation of your property before it will grant you a mortgage, which it will arrange, for a cost, on your behalf.
Always compare lots of different remortgage deals before proceeding, and seek independent advice if you are in any doubt as to which kind of mortgage might be right for you.Source: www.moneysupermarket.com