Remortgage crazy

A few years ago everyone went remortgage crazy when interest rates were low. According to the Council of Mortgage Lenders (CML), in the second quarter of 2003 when the base rate was 3.75 per cent, almost half of new loans were remortgages. After several years of base rate hikes and a quieter remortgage market, rates appear to be on a downward trend. Are we all about to go remortgage crazy again? And should we?

If you’re one of the 1.44 million people whose fixed rate comes to an end this year, you’ll definitely be shopping around and you may be in for a shock. The same goes for those on discounts. Some of those who remortgaged in 2003 suffered so-called ‘payment shock’ when their new deals expired. By November 2006 the base rate was 5 per cent and it carried on rising to the recent peak of 5.75 per cent. So, even if borrowers avoided spending time on the lender’s standard variable rate by remortgaging in good time, they would have had to pay a higher rate of interest. Added to which, mortgage lenders started to require arrangement fees of hundreds of pounds.

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Cath Hearnden of MyMortgageDirect believes the high costs have been a general deterrent to remortgaging. “In some cases, where the mortgage is not very big, the fees involved mean switching isn’t worthwhile,” she says. Other issues have had an impact. “We have seen an increase in the number of borrowers choosing medium and longer term fixed rate deals over traditional two year fixed rates,” she said. As more and more lenders are tying borrowers in by charging large fees if they repay their loan through selling or remortgaging, this has reduced the number of people able to remortgage with no redemption penalties involved. Plus, as we’ve seen, the current rates mean that taking the hit of paying the penalty is not likely to make financial sense.

Sarah Robson, of the CML, adds: “One reason for remortgaging is to release equity and the appetite for this has waned a bit.”

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Experts suggest that lower rates may give a boost to the remortgage market but are not predicting 2003 levels. Hearnden says, “People have been hanging on to see if rates would start to come down. Lower rates will start to look more attractive alongside the fees”. While trackers – where the rate is set at a specific margin above standard rates – look attractive, fixed rates won’t necessarily get much cheaper. The rates at which the banks lend money to each other will have already factored in anticipated base rate cuts.

Most lenders don’t offer the same deals to people remortgaging as to new borrowers. Some offer packages where you can opt to have valuation and/or legal fees paid or get £250 or so cashback. Other lenders waive high lending charges – costs usually imposed if the amount you’re borrowing as a percentage of the value of your home is above 80 per cent for example (‘loan to value’ or LTV). Some rates are available only for borrowers with a low LTV. Arrangement fees (sometimes called reservation or booking fees) may be as low as £150 or as high as around £2,000. Some allow you to reduce the loan as and when you like; others impose early redemption penalties.

For some, regardless of interest rate cuts, shopping around for a new mortgage is essential. And a change in prevailing conditions makes for a good time for anyone to review their mortgage arrangements. Use our checklist to help you through the process or visit our website to check out the latest mortgage best buys.

Remortgage checklist

1. Establish your current position

Allow time for the switch to take place so start thinking about it around two to three months before a discount or fixed rate period comes to an end. Check whether there are redemption penalties – charges imposed when you pay off your mortgage early. Sometimes these apply only during the early years of a special rate period. If they’ll cease to apply before too long, it could be worth delaying your switch. Your lender will itemise all charges incurred in redeeming your mortgage.

2. Ask your current

lender what they can offer you

Staying with the same lender saves hassle and can save money. You may still have to pay an arrangement or switching fee. There’ll be no valuation or legal fees.

3. See what else is available

Fixed rates sometimes look more expensive but can give you peace of mind and help with budgeting. Apart from tracker rates, variable rates may be capped and/or discounted for a limited period. Weigh up other features – fees, early repayment charges and high lending charges for example. Work out your ‘loan to value’ (LTV) position as this may affect your options.

4. Compare deals

Many of the comparison websites provide calculators but if you need reassurance that you’re on the right track, a mortgage broker can help you compare packages. Opting for a deal with a longer term on a specific basis will save having to shop around again in the short term. If you have a repayment mortgage, work out possible new payments based on the amount of time your mortgage has left to run.

5. The process

If you stick with your current lender, you’ll just need to fill in a form. If you’re changing lender, after submitting the application form, a valuation will be arranged. You need a solicitor to handle the paperwork and help time the switch so you don’t pay unnecessary extra interest.