It’s so easy to plump for comfort: sticking with a favourite old armchair that has moulded to your shape, even though it’s not the most attractive piece of furniture around. It’s easy to settle into other areas, too, such as your mortgage. But this could mean paying over the odds for the biggest financial commitment of your life – and there’s nothing cosy about that.
Most people are put off the idea of changing mortgage by remembering when they bought their home, that seemingly endless saga of mortgage hunting, conveyancing, packing and moving. But remortgaging doesn’t involve the same onerous preparation, paperwork and pressures that buying does. It simply involves changing your loan – so there is only one item that definitely changes: your interest rate.
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The pros
The main reason most people remortgage is to get a better interest rate and so keep costs to a minimum, explains David Hollingworth of mortgage brokers London & Country. It may be that rising interest rates mean your once-competitive deal is no longer such good value – if, for example, you have a tracker rate and the base rate is going up after a period of stability. Or, it might be that you’ve come to the end of a fixed-rate deal and suddenly found yourself on your lender’s standard variable rate (SVR), which will mean a steep hike in monthly repayments (see case study).
Currently, SVRs range from 5.7 to 7.59 cent, so if you’ve been on, say, a three-year 4.5 per cent fix, that would mean a big increase in repayments,’ notes Jeremy Mears, marketing manager for credit at Cheshire Building Society.
Another way of cutting your mortgage costs is to remortgage to an offset loan to cut the overall amount of interest you repay. Brian Scott, an officer at the High Court in Edinburgh, cashed in his £40,000 endowment policy with Standard Life in 2006 and moved his £100,000 mortgage to Intelligent Finance. This way we get to offset £40,000 of interest on our loan, explains Brian. It’s saving us a fortune. Standard Life calculates that offsetting an average of £23,000 on this size of mortgage will save more than half the interest payable – or around £50,000.
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The cons
With no buying process to go through, the cost of remortgaging is far lower than a house purchase: there are no estate agents’ fees, no stamp duty and minimal legal fees. You will have to pay for a new valuation, though lenders often cover this charge. There are, however, two major costs to look out for: arrangement fees and exit charges.
Arrangement fees have risen over the past couple of years and now average between £499 and 1.5 per cent of the loan amount, warns Andrew Frankish, managing director of Mortgage Talk. You can add these costs to your new mortgage, but this means you will be paying interest on them for the full term of the new loan.
Exit fees are usually charged as a percentage of the outstanding loan, on a sliding scale that decreases the longer you have had the mortgage. For example, if you want to leave your existing lender after two years, you might have to pay 5 per cent of the outstanding loan, after three years, 4 per cent, after four years 3 per cent, and so on. Because of this, a borrower should ideally switch products only after the penalty period has expired, says Frankish.
Mears points out that HSBC currently offers a remortgage deal in which it covers any exit charges payable on the existing loan, though there is presumably some limit on that, he adds.
Most of the costs associated with remortgaging can be avoided, however – lenders frequently offer special packages where they cover or refund valuation charges and legal costs, and even arrangement fees, so it’s worth looking for a fee-free deal when considering switching loans.
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Is it worth it?
Savings on a remortgage of £100,000 could be as much as £100 per month, based on a borrower on a standard variable rate of 7 per cent and remortgaging to a 5.14 per cent deal with free legal and valuation fees, says Frankish. ‘The savings on a £150,000 mortgage could be even more – up to £170 per month based on the same criteria.’
Hollingworth also believes great savings can be made. Current SVRs are way higher than the most competitive deals on the market, he points out. They can easily be two percentage points higher – and saving two percentage points on a £100,000 interest-only mortgage would cut the monthly repayments by £166, adding up to a massive £4,000 over the course of two years.
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Do the sums
Because there may be several different charges involved with a remortgage, it can be tricky to compare like with like and be sure you’re moving to a better deal over the longer term. Mears offers the following useful calculation: add together all the fees linked to the remortgage, convert them into dollars and divide by 1,000. Then add the result to the new mortgage headline rate – this gives you a rough idea of what the new rate is actually worth to you. For example: £350 legal fees + £500 arrangement fee + £250 valuation (and assuming no exit charges) = £1,100 = $2,155. Divided by 1,000 = 2.15. So if the new mortgage interest rate is 4.5 per cent, the rate for comparison to whatever rate you’re on would be 4.5 + 2.15 = 6.65 per cent. Clearly, if you’re currently on an SVR of 6 per cent, this would represent no saving at all.
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Reasons to remortgage
Although lowering your monthly mortgage repayments is a major incentive for remortgaging, there are other reasons to consider switching your loan, especially if you have owned your property for some years and have a fair amount of equity in it.
You might want to raise finance for home improvements, for example, explains Andrew Frankish, managing director of Mortgage Talk.
Other motives for remortgaging include raising finance for a major purchase, such as a holiday, new car or wedding, or to raise the deposit to buy a second property. Alternatively, remortgaging can be used as a way to pay off all other debts and roll them up into a mortgage, because interest rates for mortgages are lower than for personal loans, credit cards and overdrafts.
Away from financial considerations, you might want to remortgage because of a change in your circumstances – a move into self-employment might mean you now need a more flexible loan, for example.
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Remortgaging step by step
1. Ask your existing lender what it can offer you – remember that remortgaging this way will mean less paperwork and could cut down on costs too.
2. Calculate the cost of any charges to escape your existing mortgage. If these are too high, you might be better off staying where you are until the penalty period ends.
3. Compare your lender’s best offer to what’s available on the market, taking into account all costs and fees linked to the new loan.
4. Choose your new loan. The lender will send you an application form and arrange a valuation.
5. Contact your solicitor. He/she will organise the repayment of your existing loan with your existing lender.
6. Once the valuation is complete, the new lender will send you a formal mortgage offer. Sign the papers and the transaction is complete.
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Moving a mortgage
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When it comes to moving around, Linda Costin is used to advising other people in her job as a travel coordinator. So it’s no surprise that Linda, who lives with her husband and four children in Torpoint, Cornwall, is no stranger to moving around herself.
Linda had been with Abbey since she bought her existing property in 2003 for £60,000. Her original loan rate was a two-year base rate tracker, but as the base rate rose steadily throughout 2003 and 2004, Linda’s payments were rising alongside it. And when her tracker deal came to an end Linda saw her loan r
evert to Abbey’s standard variable rate (SVR), currently 7.09 per cent.
Monthly repayments shot up to £570 from about £500, recalls Linda, so I knew I had to move loan.
Linda plumped for a 4.89 per cent two-year fixed rate with Halifax, which carried no arrangement fee and offered a free valuation and free legal work. The new loan brings her repayments to a more manageable £507 a month. It doesn’t seem like a lot, which was why we wanted to avoid any remortgage charges, explains Linda. Obviously, if you’re only saving £60 or so a month over two years, that saving could be wiped out by expensive fees, making remortgaging not worthwhile.
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