Resist switching to a lender who is offering those remortgaging a meaty cashback but whose interest rates are uncompetitive – otherwise you could find yourself itching to remortgage again in a few years time.
You then need to weigh up the costs of switching. If these are higher than the potential long-term savings, remortgaging may not be such a good idea. And it can be expensive. The costs come from some or all of the following sources: arrangement and valuation fees for the new mortgage; early redemption penalty on the existing mortgage; mortgage indemnity premium; solicitors fees; Land Registry and local search; and buildings and contents insurance attached to the new mortgage. Also, you may end up losing your right to mortgage interest relief on the loan. So, you do need to compare how much you will save by remortgaging with how much it will cost.
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The first expense to consider is the possible redemption penalty on your mortgage. These can vary from three to six months additional interest payments if you redeem the mortgage within a certain period of time after taking it out. Some mortgages do not have redemption penalties, but fixed rates are almost certain to have them and they are common on mortgages taken out within the past four years or so. Read the small print on your mortgage to find out if redemption penalties are applied to your particular mortgage, or write to your lender asking it to list all the costs of redeeming your mortgage early. If the costs are too high, you have not lost out by asking and you can postpone remortgaging until the penalty is lower.
There are also likely to be costs attached to the particular mortgage or remortgage product to which you want to switch. Most fixed-rate mortgages have arrangement fees varying between £200 and £400. On top of this you will have to pay a mortgage valuation fee which tends to vary from £130 to £180, depending on the lender and the size of the loan. If you have negative equity in the property, you will have to find the additional amount of money you owe on your old mortgage if you take out a new one. So, dont redeem it unless you really have to.
And, don’t forget, if the amount you are borrowing is more than 70-75 per cent of the property’s value, you may have to pay a one-off mortgage indemnity guarantee (MIG) premium on the new mortgage. Many homeowners are caught out by this charge as it may not have been payable the first time around, either because lending conditions have become much tighter over the past few years, or lenders’ loan-to-value criteria have changed. Lenders do have a habit of forgetting to mention this MIG premium, so make sure you ask how much it is likely to be.
Of course if you receive a good cashback you may have enough money to pay for the remortgage and still have some left over for that holiday youve been promising yourself. If not, there are ways of keeping the expense as low as possible. Some lenders have special remortgage packages, so keep an eye out in the press for the cheapest package available. But watch out for the conditions attached to many of the fixed-rate offers or discounts.
If you remortgage the property with the same lender you may pay lower redemption penalties and arrangement fees – if you pay them at all. Also the lender may dispense with some of the legalities involved, so you may save on your solicitors bill, and they may be able to match the deal youve been offered elsewhere.
You may not hear about these deals until you ask about remortgaging. Then you will probably discover that your lender is very keen for you to stay and is prepared to offer you a surprising number of valuable incentives.
Once you know exactly how much it is likely to cost you to remortgage, calculate the savings you can make on the repayment mortgages. These obviously depend on the size and type of the loan, what the interest rate is, and how long this rate lasts for. To judge whether or not remortgaging is worthwhile compare the costs with the savings – but dont forget that the costs will be payable upfront while the savings will gradually accrue over a period of time.
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