Looming interest rate rises are giving homeowners the jitters. Many property owners are switching to longer-term fixed contracts, seeking peace of mind that when rates rise they will still be able to afford their houses. Elizabeth Henry talks to the experts about what to consider when remortgaging.
Remortgaging – moving a mortgage to another deal when the current contract finishes – seems to be on everybody’s mind.
Money websites have seen a surge in remortgaging-related searches; and in June the number of people actually switching deals jumped 61 per cent after a subdued April and May.
Surprisingly, remortgaging activity dampened a little over July.
But research firm CACI estimates that 285,000 mortgage-holders will come to the end of their existing deals between August and December, so activity is likely to rebound soon and lenders will be competing for the extra business.
Interest rates are key
The obvious consideration when remortgaging is what interest rates are doing. After five years of record low rates, the Bank of England has made it clear a base rate rise is on its way, with a target of 2.5 or even 3 per cent by 2017. It’s a sure bet that mortgage interest rates will rise as a result.
Most experts agree that there will be a rate rise by 2015 at the latest, with research from the Intermediary Mortgage Lenders Association (IMLA) showing more than one in three brokers expects a base rate rise before the year’s end.
However the last thing the Bank wants is for low-wage households to reach a “tipping point” where they can’t afford their homes, so interest rate rises will almost certainly be gradual.
Nonetheless, remortgaging onto a fixed rate now is a good way to get peace of mind you can afford your repayments for a set period, regardless of rate movements.
When you reach the end of your mortgage’s fixed-term contract, your interest rate may jump back to your lender’s standard variable rate (SVR) or a similar product.
This is often higher than what you were paying before, so it’s almost always better to look around and see if you can find a better deal. You can remortgage with either with your current lender or a new lender.
It pays to double-check what terminology a lender uses. For example, James Broome, head of product management at Nationwide Building Society’s mortgage division, refers to remortgaging as the move from one lender to another, while a customer who moves onto a different product is called a “switcher” or “internal transfer”.
Are you ready for a rate rise?
The record low rates of the past five years have left many consumers with a distorted view of what’s normal, according to research from the Resolution Foundation.
The think tank’s studies show a quarter of homeowners now think a “normal” interest rate is between 1.1 and 3 per cent.
In fact, current interest rates are about 2 per cent below the norm, the foundation estimates.
Its modelling found that if current market trends continue, by 2018 one in four mortgage-holding households would be spending over a third of their after-tax income on repayments.
And a recent study by Ocean Finance showed almost half of mortgage holders would struggle to make repayments if their interest rate rose by 3 per cent.
Nearly one in 10 survey respondents – 7.9 per cent – said a 3 per cent rate increase would definitely cause hardship and they would immediately seek to sell their property.
Such a rise could leave borrowers with repayment mortgages paying an additional £150 a month for every £100,000 owed, the loans and mortgage broker said.
Planning ahead and taking a fixed rate could mean you avoid the worst of the increases. But there are other reasons to remortgage than looking for a good deal; many people use the opportunity to borrow more money for renovations or to use as a deposit on a second property.
This is more feasible as property prices increase, giving the homeowners more equity in their home and the chance to take out a bigger loan at the same loan-to-value ratio.
Data from LMS, which works with conveyancing firms, shows that in July the average remortgage loan size grew to a record of more than £163,000, without a change in the average loan-to-value ratio.
Other people may change the term of their mortgage, making it shorter in order to pay it off sooner, or longer in order to reduce their monthly payments. This could ease the pressure if you’re struggling to pay the mortgage, but remember that extending the term of the loan means you pay more interest overall.
Market trends
According to independent broker Mortgage Advice Bureau (MAB), 93 per cent of remortgagers opted to fix in June – the highest number since the base rate was dropped to 0.5 per cent.
Yet the Council of Mortgage Lenders said as recently as May around two thirds of mortgage holders were still on some form of variable rate.
Lenders are coming up with great deals for those customers savvy enough to fix before interest rates rise. Five-year fixed rates in particular are “extremely competitive” while one-year fixed terms are becoming scarcer, MAB head of lending Brian Murphy says.
He predicts some longer-term products – where customers fix for ten years or more – could soon emerge. But brokers generally consider five-year terms to be safer, as it’s hard to predict what your financial position will be over the course of a decade.
What’s involved in remortgaging?
Take Nationwide as an example. Moving to the building society from another lender is a several-stage process, Broome says.
“The first stage of the application is to get a Decision in Principle, sometimes known as a lending decision or agreement in principle.
“This will say that, based on the information received to date about someone’s financial situation, the new lender is prepared to lend the amount requested. However, it is not a firm guarantee that the application will be approved.
“Once someone has their agreement in principle, they can go on to complete the full remortgage application.”
To complete the application, you would need:
- Details of the property
- Bank account details
- Proof of ID and current address
- Proof of employment, income and other assets and debts
- The latest mortgage statement from the current lender
- A redemption statement from the current lender
To make it easier to move, Nationwide offers a free standard valuation and either free standard legal work or £250 cashback.
“The fees payable depend on a customer’s choice of product and personal circumstances (e.g. the complexity of the legal work), but all customers will need to pay a £99 booking fee to reserve a product,” he says.
“This is to protect Nationwide in case the customer does not go onto complete.”
Customers who apply for a Nationwide mortgage in branch or on the telephone will be offered a fully advised service, Broome says.
“If a customer wants to move from another lender to Nationwide and take a bigger mortgage on their existing property in the process, they would apply to remortgage in the normal way and the case, as always, would be subject to our lending criteria.”
What do the experts advise?
Brokers are increasingly promoting five-year deals for customers who want certainty in their rates, and lenders are improving their long-term offerings. Over five years your interest rate could average out at below market rates and save you money.
Murphy says you should talk with your existing lender about your options.
“It depends on your circumstances but some will offer a follow-on product quite happily, which could mean no fees and you could jump straight through to the next fixed rate with no legal issues and no valuation costs.
“But they may not offer you the best rate, so the alternative is to look at other products.”
If you’re switching lenders, your new lender may offer to add any additional costs, such as arrangement fees, onto the mortgage rather than demanding cash up front. Remember though that such an arrangement means you will pay more interest over the life of the loan.
Your borrowing profile
Remortgaging with another lender can be straightforward if you have a good credit record, a high deposit-to-loan ratio and a steady, well-paid job.
But if you don’t fit these categories you may have trouble, so it may be best to talk to a broker. They can do the time-consuming legwork for you, they have more inside knowledge, and many don’t charge fees.
If you’re a good customer your current lender could make more of an effort to keep you. They might let you revert to the standard variable rate, or they might offer an attractive follow-on product.
Nationwide’s existing customers are looked after with incentives, such as a 0.10 per cent discount on the rates offered to outsiders, Broome says.
He adds: “We constantly monitor our rates against the market to ensure that the offers available to existing customers compare favourably with those available at our main competitors.”
What about negative equity?
Remortgaging becomes difficult if your home’s value has fallen and you now have negative equity – i.e. your home is worth less than your mortgage.
This is still the case for many borrowers in Northern Ireland as well as Scotland and the North East.
These “mortgage prisoners” are at the mercy of their current lender as other lenders won’t take them on, Murphy says.
“They can stay with their own bank but often they won’t be offered new attractive rates by their current lender.
“They’re locked in and the lender can charge [what they want].”
As home values increase many people will be lifted out of negative equity, but until then they are usually charged higher rates on their new mortgage.
For some it may be wiser to sell up and move back to renting, Murphy says.
When should you remortgage?
Broome explains: “It makes sense for customers to start considering options up to three months prior to the maturity of their current deal term if there is an early repayment charge payable on the existing product.
“This is because customers have at least 90 days to complete on a remortgage once they have applied.”
Applications are usually offered within two weeks and then the product is available for 90 days from that point. Make sure the completion date agreed with your lender is after the end of any early repayment charge period.
“At the very least, start working on your plans well before your current contract ends,” Murphy advises. “That way you’ll be ready to jump onto a new plan as fast as possible and avoid the higher SVR for longer than necessary.”
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Case Studies
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[tab title=”Andy Jardine“]
You can’t predict the future
Andy Jardine took the advice of an independent adviser when he took a mortgage with Santander (then Alliance & Leicester) to buy a house in Bolton.
He bought the terraced two-bedroom house in October 2009 – a great time for snapping up a bargain.
Unfortunately Andy, a dental technician, was advised to fix for five years at 5.9 per cent, and then had to watch those around him enjoy record-low interest rates while he kept paying through the teeth. So it’s no surprise that when the 35-year-old reached the end of his term he decided to do his own research instead of using a broker.
On August 1 Andy moved to a two-year tracker mortgage with Nationwide Building Society. Remortgaging was simple, with a revaluation showing his house had risen in value.
But instead of borrowing more money, or taking it easy after almost halving his interest rate, Andy chose to keep his repayments high and cut the mortgage term from 30 years to 14. “I could have taken a big drop in payment but I’d rather pay it off quicker, to be honest,” he says.
Andy started shopping around about four months before his mortgage contract came due.
“You don’t know what’s going to happen – there’s no crystal ball, but now I’ve got the benefit of hindsight. In 2009, it was my first ever property and I didn’t have a clue about anything to do with buying a house, so I did need some advice.
“But this time when it came to remortgaging I just thought ‘I’m going to do it myself’. So I had a look around on the internet and found Nationwide. They’ve been very good to deal with – I’m really happy.”
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[tab title=”Tony & Gill Morrison “]
Find a lender you like
Tony and Gill Morrison are old hands at remortgaging, having owned their buy-to-let property in Gateshead for 15 years.
Tony is a company sales director and Gill is retired. Their buy-to-let, just a few houses down the road from their own home, is intended as a pension fund. They’re unlikely to sell it any time soon because the tenants have become such good friends.
The Morrisons came to remortgage the house in April at the end of their fixed deal with Britannia, which is part of The Co-operative Bank. They’ve moved to a fee-assisted two-year fixed rate of 2.79 per cent with Leeds Building Society.
Both in their 50s, the couple have been through the remortgaging process so many times that they don’t use a broker, Gill says.
“We just did it ourselves – my hubby’s very good at figures. Because of the uncertainty of the interest rate, we opted to fix for two years to see how the land lies. In two years’ time if rates rise we will have an idea of what we’re dealing with.”
Although it should have been simple enough, there were some hassles with their legal firm, which took several months to finish the work. “By the time we answered their questions the process had expired and we had to start again,” explains Gill.
But Leeds was extremely helpful in ironing out the legal problems, which is part of the reason why the Morrisons moved lender. “They were absolutely brilliant…and really efficient. I think that’s why we went across. They were very professional and dealt with every little question we had.”
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