Remortgaging could save you money in the long run but make sure you do your homework to find out what costs are involved and work out what is the best route for you. Vanya Damyanova reports.
Everyone who holds a mortgage will probably have to refinance at some point. Many are choosing to change their existing deal either to save money or to raise some extra cash, or get a better offer. Whether they would indeed be able to achieve their goal depends on planning well, choosing the right moment to do it and above all calculating correctly the cost of remortgaging.
In our last issue, I looked closer at 10-year fixed rate mortgages as a potential better alternative to shorter-term products. One of the advantages to being on a longer-term deal is not having to pay the remortgaging costs every two or three years.
There are a lot of fees and charges to consider when moving from one mortgage agreement to another. Expenses can get high enough to actually make a remortgage not worth while.
Nevertheless, remortgaging can get you a good amount of extra cash or can reduce your interest rate payments if you find a better offer. Sometimes the smart thing to do is remortgage.
So, how do you decide when is the right moment for you to take that step?
First, estimate what would it cost you to change your current arrangement. You will have to pay for exiting your old agreement and setting up your new mortgage deal. Usual fees related to that are:
To exit
-You may have to pay your existing lender an early repayment charge, a redemption charge or exit fee
To enter
-Your new lender (in case you have decided to switch providers) could charge you a booking fee, a reservation fee, a valuation fee and a fee for release of funds
-Legal & broker fees: You definitely would need a conveyancer or solicitor who will carry out all the legal arrangements and switch the new mortgage to you. You will have to cover broker fees if you decide to use a mortgage broker to help you choose a product.
Many lenders offer to cover some of the fees, especially legal and valuation costs to keep existing clients. That is why you should check with your lender first before considering switching to a new provider. Making a new deal with your old provider may turn out more lucrative for you if it saves you part of the cost.
Even with a remortgage package from your lender, the cost will not be negligible. According to Nationwide estimates, the average cost of remortgaging is around £1,000.
Having done the maths and knowing what your fees will be, it is time to do the comparison and see if it be worth it to remortgage. To do that you have to research the market and see what better deals are out there.
It is always good to seek the advice of an expert. Although it may cost you a bit more upfront, getting a broker’s point of view and recommendation may pay off in the long term. The multitude of offers on the market may be confusing or take too much time to sort through. Receiving professional advice will always help with boosting your confidence about having considered everything necessary for a good deal.
When you have chosen your new mortgage, it will be time to apply. An application process for a remortgage is very similar to the processes when applying for a mortgage the first time.
Lender requirements have increased recently and are bound to get even tighter this year as the new Bank of England rules will be tougher for them as well. Keeping a good credit record should be a rule of thumb for every mortgage holder in the current market.
Knowing where the market is moving to and what the sentiment is at the moment could give you useful hints about when to remortgage. Looking at what others have done is also helpful.
Other homeowners choices
A recent survey from property services outsourcing company LMS found that 17 per cent of the people remortgaging in December 2014 increased the amount of their loan by as much as £10,000. Almost a quarter (24 per cent) of homeowners changed the size of their mortgage by more than £1,000 and the reason for doing that was to pay down debt.
Another reason for remortgaging was the possibility of cash savings, with 37 per cent of people adding up to £500 to their savings pots via a new remortgage deal. As much as 3 per cent managed to increase their savings by more than £500.
A’most two thirds, or 64 per cent, chose to remortgage to take advantage of new competitive offers with lower interest rates.
The proportion of people who used the opportunity to switch lenders was even higher (77 per cent). More than a third (37 per cent) of homeowners looking to remortgage consulted an independent adviser to find the best offer on the market before they switch their loans.
More than a quarter (26 per cent) of survey respondents expect interest rates to grow in the near future, which is one explanation why so many people are considering remortgaging at this point.
“With a plethora of competitive rates currently on offer, savvy borrowers can snap up a good deal to boost monthly finances at a time when many households feel strapped for cash – especially after what for many will have been a Christmas splurge.
“Borrowers should not be complacent, however, as competitive rates will not be around forever, and with a cooling in the wider mortgage market now may be the best opportunity to shop around for offers and provide an injection of cash to your monthly budget,” Andy Knee, chief executive of LMS, said.
Other things people used the extra cash from remortgaging include: funding home improvements (19 per cent), consolidating debts (9 per cent), helping their children get on the property ladder (1 per cent).
The market right now
Affordability improves – According to LMS figures, remortgage affordability is at its best level since January 2011.
The annual repayment as a proportion of income in December last year was 18.8 per cent, down from 19.2 per cent in November and from 20.4 per cent a year earlier, the outsourcing property services specialist said.
“We’ve finally started to see wage growth, bringing some welcome respite to families who really felt the pinch over Christmas; the average amount of equity withdrawn through remortgaging per customer fell by a third compared to December, suggesting less pressure on household finances,” Knee added.
Right choice could save you cash – The Mortgage Advice Bureau (MAB) says in its latest National Mortgage Index release that borrowers could save up to £2,000 per year if they change their mortgage deal.
The saving, estimated using data from Moneyfacts.co.uk, could be realised if you choose a more competitive deal. MAB’s index has shown a continued drop in average mortgage rates across the board in January 2015 for a fifth consecutive month.
January’s typical remortgage applicant had a salary of £47,881. This means the amount they would save is equivalent to a 2.8 per cent pay rise – or 3.8 per cent compared with a net salary of £34,912 after tax and National Insurance contributions.
Brian Murphy, head of mortgage lending at Mortgage Advice Bureau, commented: “Remortgage activity fell behind last year as borrowers were placated by further delays to the base rate rise and lacked an opportunity or incentive to change their current deal. However, many people will find they could benefit from significant monthly savings by moving from their current product: particularly those who are on inflated standard variable rates (SVRs).
“The current price war has been intensified by fierce lender competition and a number of new entrants to the market.
“Specialist lenders are now going head-to-head with traditional competitors and eye-catching product launches have become commonplace, giving rise to historically low rates.
“Many borrowers on their lender’s SVR can effectively give themselves a pay rise that beats wage growth simply by remortgaging. Remortgaging is often less hassle than people think, and the savings gained by moving from an outdated product are well worth the effort.
“If you’re confused about the wealth of options available or the fees involved, seeking advice from a whole-of-market broker can help to identify the best deal for your circumstances.”
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Expert tips
Tony Harris, managing director and founder of Contractor Financials, an independent financial advisor to freelancers and contractors comments on the cost of remortgaging and current market developments:
“Historically lenders have taken their existing clients for granted, leaving borrowers with the choice to stay on an excessively high standard variable rate (SVR) or take their business elsewhere. Thankfully, some lenders have seen the light in recent years and now appear to value their existing mortgage customers as highly as new borrowers.
“So called, ‘retention’ mortgages, offered to borrowers by their lender at the end of an initial fixed or discounted rate, have become more widespread and provide a relatively low cost and hassle-free way to maintain a competitive interest rate.
“Those who have the time and inclination to shop around still stand to save the most on their next mortgage as its unlikely that your current lender will always be top of the best buy tables. The new lender you switch to will often offer free valuation and legal fees to attract your business although there may be some form of product fee to fix or discount your interest rate.
“Since the Mortgage Market Review of last April an extra degree of complexity has made the task of securing the next competitive interest rate scheme tougher for many borrowers and this is where the services of an independent mortgage adviser could be useful. A mortgage broker should have a good understanding of the myriad of often hidden income criteria that lenders now apply to borrowers; and whilst many advisers now charge a fee for their services (in addition to receiving commission from whichever lender you decide to choose), there are a number of good firms that still maintain a ‘fees-free’ model so you shouldn’t have to incur any additional costs to make use of this expertise and product knowledge.
“2014 heralded a new era of ultra-low mortgage rates and latest raft of rate reductions have surpassed even the most bullish of expectations with some variable rates now dipping below the 1 per cent watermark.
“Remortgaging is pretty cheap these days with the vast majority of lenders offering free valuation and legal fees. There’s also an array of ‘fee-free’ mortgage deals allowing borrowers to simply take advantage of a lower interest rate.
“Whilst ‘fee-free’ deals may sound attractive they rarely work out more cost effective even at a modest level of borrowing.
“Just take the two market leading fixed rates – Woolwich’s two-year fix at 1.38 per cent which has a £1,499 arrangement fee and Santanders ‘fees-free’ two-year fix at 1.99 per cent.
“Customers borrowing just over £125,000 are better off paying a £1,499 fee to secure a lower rate as the reduced interest they’ll pay will far outweigh the initial set up cost.
“Borrowers who took out a mortgage in the heady pre-credit crunch epoch where lending rules were far more relaxed are finding it the hardest to secure a new deal and many are on high SVRs.”
Those who have been knocked back by a new lender shouldn’t throw in the towel just yet. Since April lenders have been under increased pressure from the Financial Conduct Authority to look after their existing borrowers even if they fall outside of the lender’s current policy.
The Mortgage Market Review allows lenders, who are still trading, to overlook their current policy and lending limits where allowing a customer to take a new rate is in the borrowers best interest.
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