The frustrating thing about shopping around for a mortgage – if you are only interested in getting the lowest interest rate – is that a cheaper loan could always be just around the corner.
According to recent research from Abbey, over half of all homeowners have remortgaged. Remortgaging is the process of moving your mortgage loan from one lender to another for a better deal and new mortgage terms.
The most popular reason to do this is usually to consolidate debts or release some of the value of the property, particularly over the last few years as property prices have rocketed, which means for many their mortgage is far smaller than the value of their property. Others have overpaid on their previous mortgage and want to shorten the term of their mortgage deal, but many are simply looking for a better deal to lower their monthly repayments.
As the mortgage market gets more competitive, consumers have also caught on to the fact that thereÂ’s no need to wait out the average 25-year mortgage term paying through the nose on a mortgage lenderÂ’s high
standard variable rate (SVR) when your discount period has finished. If you donÂ’t remortgage before the deal period ends, your monthly payments will leap because the mortgage lenderÂ’s own rate or SVR is likely to be far higher than the previous rate paid.
This is especially relevant right now for many people who chose very low two-year fixed rates during the summer of 2003 when mortgage rates were at 3.50 per cent. Abbey offered a loan at 3.49 and Nationwide a loan at 3.79, which are about to leap to 6.75 and 5.99 respectively if borrowers donÂ’t remortgage, a difference of 2.2 per cent for Nationwide customers and 3.26 per cent for Abbey customers respectively.
Do the maths
The first thing to do is to check that moving your mortgage will save, not cost, you money.
Always ask your current lender if they can offer you a better rate first. If they can, this could be a far cheaper option than moving to another lender, which could cost you legal, valuation and application fees that often run into hundreds of pounds.
All lenders offer mortgages with low initial rates for a certain period, say two, three or five years; when this period ends, rates automatically revert back to the SVR, which is generally higher than the bank base rate set each month by the Bank of England and relatively uncompetitive when compared to these other initial-rate ‘honey-pot’ deals. This is why many borrowers consider remortgaging to a better rate before they revert to SVR.
But be careful. All lenders charge a fee if you redeem your loan before the offer period ends. But some mortgages have overhanging redemption penalties, say for three years on a two-year loan, which means your lender will still charge you if you try to move after the offer period. Avoid these loans if you can, because these percentage penalties can amount to thousands of pounds.
Some lenders also still expect you to pay legal, valuation and application fees to move your mortgage loan. But some will waive these fees, saving you several hundred pounds, so itÂ’s worth shopping around.
The Bank of England interest rate – currently at 4.75 per cent – has been hovering at some of the lowest levels seen for over 50 years, which is also good news because mortgage borrowers are paying far less interest than in previous years as a result. (See page 27 for the What Mortgage remortgaging checklist.)
WhatÂ’s out there?
Paying a higher mortgage rate than you have to is never good. But do consider what other benefits a mortgage can offer you as well as the rate.
You can fix your mortgage rate for a set period if you want monthly repayments to be predictable, or can opt for a tracker which follows the movements of the Bank of England base rate – an attractive idea if you think interest rates are about to fall.
It is also possible to ‘overpay’ on a monthly basis, allowing you to reduce the term of the loan, or take ‘payment holidays’, ‘draw down’ extra funds, use existing savings to offset against the outstanding mortgage balance, or even run a mortgage through a current account. These are just some of the features on offer, and although the headline rates may not be the most exciting, sometimes other features like lower fees can save you more money.
For example, an overpayment facility allowing you to pay lump sums of cash off the capital sum borrowed could benefit those with work bonuses or erratic freelance earnings.
Making your mind up
Choosing your mortgage, says Stuart Wilson, spokesman for the Mortgage Advisory Group, is a little like buying a car, with the best mortgage rates being something like a sports cars glimmering in the showroom window. While this will be right for some, many have circumstances and commitments that point to a more practical vehicle. He comments: “You can go and buy the sporty number, which is the rate option, or you can look a little more deeply and consider miles to the gallon, the servicing costs, the maintenance costs, and safety record.”
As consumers begin to look at how they can use their mortgage, Alan Dring, head of sales at Standard Life Bank, believes the market for people with credit problems – the ‘sub-prime’ market – will contract in the coming years. He explains: “In ten years’ time if flexible mortgages do their job there will be a diminished sub-prime market and that will be because of the way people use the product to facilitate their changing life circumstances – be it divorce, redundancy, or illness – by using the payment holidays or overpayments they have made to release cash in times of trouble.”
A recent report by mortgage lender GMAC-RFC revealed that many spiral into debt after a crisis, for example divorce or redundancy. Dring says borrowers will be able to use the elasticity in their mortgage to pay legal fees or simply keep up with the mortgage and get back on track when things improve.
Louis Kaszczak, national partnerships manager at The One Account believes flexible mortgages can benefit those with a little extra money to play with each month. He says: “Flexible mortgages are really suited to people who can look to overpay slightly each month and so are not stretching themselves in terms of affordability to the full. Even if they are only overpaying £10 or £20 a month that makes a huge difference by shortening the term of the mortgage.”
Kaszczak says those running small businesses can benefit by using the savings accounts on an offset feature as a tax account, allowing the money to earn a good rate with no notice given when the money is needed when the bill finally needs to be paid.
However, potential borrowers first have to know what the options available are and take the time to investigate the potential benefits. Paying the lowest price will always be attractive, but sometimes it does not represent best value.
CASE STUDY:
Bryn Jones is a 57-year-old semi-retired former healthcare manager living in Plymouth. He had an endowment mortgage but remortgaged to The One Account in 1989.
He says: “The thing that really attracted me to The One Account was having different money in different places such as odd savings accounts although nothing earns you as much as borrowing money costs you. But using my savings to reduce interest payments and still being able to access this money was very attractive.” Discipline is the key to success, he adds: “The One Account is very good if you are capable of managing your money wisely. I am always ahead of repayments on the account and so I was quite comfortable spending £18,000 on a boat. By overpaying you give yourself a buffer, which you can then draw on as and when you need it.”
Elsewhere the flexibility has been superb, he says. “I lived and worked in Plymouth and my firm wanted me to move to Bournemouth for a period. A word with Virgin One and they then spread th
e mortgage over two properties so I was able to buy a flat in Bournemouth and keep the house in Plymouth without needing separate mortgages.”
He concludes: “Having had a flexible mortgage I don’t think I could see myself going back to a more traditional type of mortgage.”
