Even a decade ago, remortgaging – moving from one mortgage lender to another – was an unusual thing to do. But for today’s savvy consumers it’s all part of keeping on top of your finances.
“ You never used to dream of changing your bank account, but people now routinely switch bank accounts and credit cards. Mortgages were one of those things no one thought of, but now people aren’t afraid to switch their mortgage too,” says Sally Laker, managing director of Mortgage Intelligence, a network for mortgage brokers.
According to the Council of Mortgage Lenders, around 1.4 million people remortgaged in 2004, which is about 38 per cent of all the mortgage borrowed over that time.
Borrow a little more.
ItÂ’s also popular to borrow a bit extra when you remortgage to do things like improve the house, or at the more extravagant end, to fund a world trip.
“ There are few pound-for-pound remortgages now, where people simply switch mortgages,” Woolwich head of mortgages Andy Gray says. “Probably about 75 per cent of people take out some equity in their property, even if it’s a modest amount because they consolidate a bit of debt – they want to tidy up their lives.”
But there are a variety of reasons why you might want to remortgage. Perhaps you are coming to the end of a good mortgage deal and donÂ’t want to see your payments suddenly go up a notch. Maybe you want to redo the kitchen, add another bedroom or pay off the car. You need extra money to do it and perhaps a different lender will give you a better deal.
Other reasons include things like changing home ownership – if you’ve just got divorced and need to get the mortgage in just your name, for instance. Or it may simply be that you’ve just woken up and realised you’re paying more for your mortgage than you need to be.
“ It could just be that you’re paying more because you’ve been a faithful customer of your bank or building society for the last 20 years and find that your loyalty is repaid by being charged more than anybody else,” Laker says.
Choices, choices.
So if youÂ’re thinking of remortgaging, what are your options?
There is, in fact, a wide array of mortgage products to choose from – most lenders offer all their products to remortgagors because they want such business badly. But before you start, you need to work out what your aspirations and needs are first.
Basic mortgage types include:
• A variable-rate mortgage, where the interest you pay on your borrowings goes up and down whenever your lender changes its mortgage interest rate. So if the rate drops, your interest will too, but the downside is that if the rate goes up, so do your payments.
• Fixed-rate mortgages, on the other hand, lock you into a set interest rate for a specified period, normally between two and five years. Once this fixed-rate period ends, your mortgage generally switches back to your lender’s standard variable rate (SVR). The advantage of fixing is that you know exactly how much your payments will be each month, so it’s good for budgeting. The downside is that if variable rates across the market fall during your fixed term, you’re stuck on your fixed rate.
• Capped-rate mortgages are linked to a variable rate, so your payment amount can go up and down. However, while the rates can go down as much as they like, they cannot rise above a set level.
• Discounted-rate mortgages mean you get a discount on whatever the lender’s SVR is for a limited period. Again this means the amount of interest you pay can go up and down, but at a lower level than the variable rate.
• Tracker mortgages have the interest rate set a certain amount above or below an external variable rate, such as the Bank of England base rate. For example, you might get a rate that is say 1 per cent over the base rate for three years. The advantage is that when the rate falls you benefit, but if the rate goes up your repayments rise.
Other variations on the mortgage theme include flexible mortgages which allow you to over- or underpay and take payment holidays under certain conditions.
There are current account mortgages where your current account and mortgage effectively become one and interest on your borrowings is calculated daily. This way your overall loan size is reduced by the balances you would normally hold in other accounts, so you pay less interest.
Offset mortgages work in a similar way to the current account in that you can offset any savings account balance you hold with your mortgage lender against your mortgage debt, reducing your interest, but the accounts remain separate.
One Account spokesperson Debbie Milsom says people remortgaging to a current account or offset mortgage will be looking for a mortgage that gives them the freedom to overpay, underpay or take a payment holiday. “With more and more people working flexibly and with variable incomes, these products can give the freedom these people require,” she says.
Ray Boulger of mortgage broker John Charcol expects interest rates to fall during 2006, so suggests that anyone with the luxury of being able to hold off going on to a fixed-rate deal at the moment should do so. But he warns that you need to guard against being stuck on a high SVR for too long.
Fees and charges.
Other things to bear in mind when remortgaging include looking into any penalties you might face when leaving your current deal.
Paul Hearnden, managing director of adviser MyMortgage Direct, points out that it’s important to weigh up the fees involved with remortgaging, particularly with loans of around £110,000 and less. With mortgages of this size, getting a good deal on things like arrangement and booking fees can have a big effect, he explains.
“ Sometimes if you run a cost analysis on it, it’s better for someone to go on a 5 per cent rate than on a 4.5 per cent rate, because the costs are much less at 5 per cent and you never get that cost differential back,” says Hearnden.
