The Bank of England base rate was cut to 4.50 per cent at the beginning of August after nearly a year at 4.75. But before this happened, the long-predicted consumer slowdown seemed to have taken hold.
As confidence dropped, the number of people remortgaging tumbled by nearly 10 per cent since the start of the year. However, despite all this bad news, the actual average cost of taking out a mortgage has been falling.
Ray Boulger, spokesman for mortgage adviser, John Charcol, says: “Two interesting surveys were published recently one by the Bank of England and the other by Yorkshire Bank reveal-ing the public’s jitters on interest rates, when finding that around 50 per cent of respondents thought the next rate move would be upwards.
He continues: As a result, today’s cut is likely to stimulate the first shoots of recovery in the housing market, and I expect to see a significant change of mood over the next few months. The pendulum will swing from a buyers’ market to equilibrium and then, by next spring, a sellers’ market.
So with good news around the corner, what has been putting homewowners off changing their home loan?
Martin Alton, head of mortgages at Yorkshire Bank, believes statutory mortgage regulation, introduced in October 2004, might have played a role. Following the introduction of regulation, lending business declined a bit, he notes. Im guessing this is because lenders were far more concerned about making sure they were in compliance with the new rules than they were about making new sales. But were through to the other end of that process now and business is picking up again.
Paul Fincham at the Halifax says: There have been some very good deals lately because money market rates have been very up and down, and lenders have repriced their fixes and trackers over the past few weeks as a result.
With fixes and tracker rates having come down since the start of the year its hard to believe that around 35 per cent of all borrowers still have SVR mortgages which means theyre paying top dollar for their home loans, says Alton. Now think of all those customers who took out fixed rates three years ago, when interest rates were at the bottom of their cycle those fixes will be coming to an end soon, so borrowers should be looking at what they want to do next with their loans. Otherwise they will end up on their lenders SVR.
Time and money
Even if your existing rate isnt coming to the end of its run, it still makes sense to consider remortgaging.
Its always in customers interests to review their loan arrangements on a regular basis to ensure theyre still getting a good rate and that the product is still the most suitable loan for their needs, explains Jimmy Kelly, mortgage manager at First Direct.
In a mortgage market as competitive as the UKs, your mortgage lender should be keen to keep your business, adds Alton. Ask yourself what type of lender you want to be with, he suggests. Do you really want to be with a lender that doesnt contact you regularly to inform you what else is on offer after your current deal is ending?
Of course, the interest rate isnt the only issue to consider. One thing to look out for is the hidden costs of remortgaging, cautions Fincham. Most best-buy tables are still calculated on annual interest rates, and borrowers might not realise just what a difference it could make to their overall debt if those rates were daily interest. Most people just dont know what sits behind the headline rate.
Those hidden costs include arrangement fees on the new loan and early redemption charges (ERCs) on your old loan probably the biggest single obstacle to remortgaging. Theres also the not so small matter of how interest is charged on the loan youre redeeming, as Fincham explains: Most lenders still charge interest to the end of the month, so if you redeemed your loan on 2 June youd still be paying interest until 30 June that can make a huge difference to your costs.
The amount of time it takes to process the remortgage can also have an impact on costs. Some lenders take longer than others supplying redemption figures, without which the remortgage cant proceed, says Kelly. These figures are valid for just one month, so if the lender drags its feet and the process takes more than four weeks, the figure becomes obsolete and you continue paying interest at the old rate.
In most cases, however, the process takes around four to six weeks. Most lenders will pay your valuation fee your home will have to be revalued before you can remortgage as well as your conveyancing costs and, because youre switching your loan rather than actually buying a property, there is no stamp duty.
Be warned, though: the more costs your mortgage lender covers, the higher your interest rate is likely to be. For example, Clydesdale offers a two-year fixed rate of 4.65 per cent, but for remortgages with free valuation and legal fees the rate is 4.69 per cent.
Flexibility
Product design is also important: your circumstances might mean you now need greater flexibility from your mortgage, for example.
Halifax recently introduced a menu-based approach to its remortgage range. Borrowers start with a standard loan, and then choose which other elements to add to it, such as having Halifax pay for the valuation and/or cover the standard legal fees, or choosing to pay arrangement fees. The combination of elements taken is reflected in the interest rate finally attached to the loan.
If you feel rates are good right now, and you want to make the most of it, but you dont want to have a loan with ERCs or pay an arrangement fee, you can find the lowest cost for switching your mortgage, says Fincham.
Other lenders offer other innovations. First Direct, for example, sends text messages to mortgage applicants. We realised that it can be unnerving for borrowers who dont hear anything for a few days, explains Kelly, although this is usually because nothing further has happened. The text messages help reassure customers that the process is still ongoing and everything is fine.
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