Back in July 2003 it was summertime for the mortgage market and the living was easy. The Bank of England base rate was at 3.5 per cent – a 50-year low – and many borrowers were taking advantage of the widely available two-year discount and fixed rates set around this 3.5 per cent mark.
This summer those two-year term discounts will be ending, and thousands of borrowers will be reverting to their lenders’ standard variable rates (SVR) – the basic rate charged by a bank or building society when a deal or discount has finished.
At the moment average standard variable rates are around 6.75 per cent. So for those paying interest at 3.5 per cent on their mortgage for the last two years, the good times and the cheaper repayments are definitely coming to an end.
What next?
These borrowers should be looking to exchange their existing mortgage for another with more favourable rates, terms and conditions – otherwise known as remortgaging.
According to the Your Move remortgage index, any borrower could save £1,740 in interest in the first year if they move away from their SVR over to a top-rated discounted variable rate deal.
However, before considering this option borrowers must be clear on what the terms are of the mortgage they already have, to make sure they will actually save money by paying off (or ‘redeeming’) the mortgage and moving on to another lender.
Jayne Scarratt, spokeswoman at Britannia, says: “If someone were looking to remortgage, we encourage them to check out their own circumstances first instead of just chasing the best interest rate.”
Redemption penalties
During the discounted or ‘honey pot’ period of most mortgages, lenders will charge a penalty for redeeming the loan. So, it is unlikely that during this period remortgaging will produce any savings in the short term. Some lenders also have a penalty still in place, applicable after the discounted period has ended – this is called an ‘overhanging’ redemption penalty’. In these cases borrowers have to pay the lender’s SVR for a number of years after the discount has finished before they can move without penalty. These overhanging redemption penalties also make it difficult to find deals competitive enough to make remortgaging worthwhile.
Also – don’t forget that remortgaging can be a costly process in itself. There will be valuation fees – any new lender will want to carry out a property valuation and you will need to instruct a solicitor or conveyancer to oversee the transaction. Lenders also charge an arrangement or application fee to take care of administration costs. In total these fees cost upward of £1,000, although there are lenders, including Alliance & Leicester, who offer fee-free remortgages.
Save yourself £££s Although remortgaging is not for everyone, serious savings can be made. Jonathan Cornell, technical director at mortgage adviser Hamptons’, comments: “If you look at a typical lender’s variable rate of 6.75 per cent, there are deals at the moment where you can borrow the money for 4.75 per cent.” Cornell adds: “If a typical mortgage is £120, 000 then you can save £2,400 a year by switching from SVR on to a rate like that. I would say an extra £200 a month is tremendous value for changing your mortgage.”
Although these savings do not take into account any fees you may have to pay, Cornell also warns that borrowers should not be swayed by fee-free mortgages with slightly higher rates. Over the long term and especially for large mortgages even a slight increase in rate can make a significant difference and may make an upfront saving of a thousand pounds on fees seem foolish once the fees have been added to the calculations.
Short term or longer term ?
Estate agency Your Move recently released its Remortgage Index, highlighting some of the savings that could be made. However, it warned that two-year mortgages may not be the best option in the long term. Jon Round, remortgage analyst at Your Move, explains: “Remortgaging to these deals runs the risk that similar attractive offers will no longer be available after two years. Borrowers may well be wiser to lock in their savings with longer-term deals.”
Clearly, it is difficult to predict what the market will do over time, but borrowers must be aware that the products available today may not be there tomorrow. A shorter-term mortgage may offer greater savings in the immediate future, but it may force the borrower to take on a more expensive mortgage sooner if interest rates have risen by the time the discount period ends.
Be prepared
If youÂ’re thinking about remort-gaging, time is also an important con-sideration. Borrowers should leave at least eight weeks for a remortgage to complete and should check whether their mortgage provider charges interest on a daily or monthly basis. For those charged on a monthly basis, even running over the discount period by one day will mean the higher SVR is charged for the whole month.
As Colin Dale, head of lending at Skipton, says: “Borrowers need to go somewhere where they are sure they are going to get prompt service. A lot of people want to go from the end of one product to the start of another but what they do not want is a period in between where they are going to be paying more than they need to.”
As Paul Lloyd, head of product development at lender First Active, says: “People leave the remortgaging decision until a month or so before they need to act and it is almost too late by then. If a bit more time had been spent, many could avoid paying over the odds.
Broker ‘best-deal’ recommendations
FIXED-RATE MORTGAGE – Northern Rock’s five-year rate at 5.39 per cent. Although it has an arrangement fee of £695 and legal and valuation costs of £400 and £410 respectively, there is a £1,000 cashback on completion, meaning the net cost of fees is approximately £500. The Northern Rock deal also allows overpayment and drawdown of any overpayments made, giving a large dimension of flexibility.
DISCOUNTED-RATE MORTGAGE – Skiptons ‘Stateside’ tracker, a variable rate that tracks the US interest rate, offers a current rate of 4.42 per cent until June 2012. Although the arrangement fee of £599 may deter some, it offers free legals for remortgage cases and valuation is also free. Buildings insurance is compulsory.
The First Active range of tracker discounts of two, three or five years – all at 4.75 per cent – offer great value. All offer free legals and free valuation. There are no overhanging penalties and no compulsory insurances.
CAPPED-RATE MORTGAGE – The Derbyshire Building Society’s five-year rate, capped at 5.79 per cent (with a current pay rate of 5.3 per cent) is a good all round product with a small niche player in the market. Free legals and free valuation, again, are included, with a lender arrangement fee of £350 in total. Overpayment options are allowed.
