A guide to remortgaging

Remortgaging means, transferring your mortgage from one Mortgage Company to another, or switching from one deal to another even from the same provider to get yourself a better deal. And you don’t even have to move house to do it.

In recent years almost a third of all home loans were actually remortgages, as millions of smart borrowers took advantage of the UK‟s hugely competitive mortgage market. There are many reasons why remortgaging made sense for them, and could also make sense for you, but the main one is simple = saving money, a very large amount of money in the majority of cases.

For most people, their mortgage is their biggest financial commitment. And it makes sense that streamlining the largest debt can produce the largest saving. If you’re the kind of person who shops around to get the cheapest television or washing machine, then you’re missing out by not using the same processes to save money on your mortgage. However, by September 2009, the economic crisis meant interest rates had reached record lows. Many standard variable rates (SVRs), the rate most mortgages revert to after an initial discounted period, were at absolute rock bottom too. For some, sticking on the SVR is the best option, a previously unimaginable situation. If you’re considering this, ensure remaining on this rate is a positive choice rather than a lethargic one, otherwise, you may find you’ve missed out on a small fortune. So before you switch lenders, challenge your current lender to give you a new better improved offer. Remember, it makes money from your debt so it certainly does want to keep your custom.

Why should I remortgage?

If you do need to move, bear in mind, although remortgaging can save you money, it does so at a price. In fact, as mortgage interest rates have dropped, the fees lenders charge, have increased significantly. You may have to pay an exit fee to leave your current lender and, depending on your deal, an early repayment charge as well. You may have to pay an arrangement fee to join your new lender and pay legal charges too. If you use a mortgage broker to help you find a new deal, some of them may charge too (although as we’ll discuss later, you can find brokers who won’t). This doesn’t mean you shouldn’t remortgage. Normally the savings will still be huge – but it does mean you should do your maths before making the jump. The lack of available borrowing, due to the credit crunch, means lenders have become more selective in who they lend to, to ensure those they deem to be the best customers get priority. Those seen as better customers are those with larger deposits and with spotless credit histories. In other words, previously lenders were salivating with glee at the thought of lending to anyone and everyone, and would throw money out there, now their fists are tightly clinched around every penny. In the old days, good deals were shockingly available for those who were borrowing up to 125% of their home’s value. Now, that’s changed and by September 2009 you needed a 25% deposit to stand a chance of getting a decent mortgage. However in recent years we are increasingly seeing an increase in 95% mortgages once again.

Other Reasons to Remortgage

It’s not just about saving money. It’s also about getting a mortgage which is right for you and your situation. So here are some more reasons to think about remortgaging.

It’s time move house

Maybe you’re moving up the property ladder and need to borrow more money. Some mortgages are portable, that is you can transfer them to a new property. But if you also need to borrow more money at the same time to buy a more expensive property, it could make sense to take out a new mortgage for the whole lot. Bear in mind however that it has became a lot more difficult in the last two years to obtain a mortgage so give this careful consideration before going ahead with it.

Your mortgage doesn’t fit any more

You’ve had a pay rise or maybe you’ve inherited some money. You want to make extra payments to your mortgage but your current deal won’t let you. Or perhaps you need to be able to miss a payment. Changing jobs, going back into education, going travelling – whatever the reason, there are mortgages which will let you take payment holidays. Maybe you’ve been tempted by new and exciting mortgages which combine your savings or current accounts with your mortgage. I will discuss more about those later. Whatever flexibility you want in a mortgage, chances are it’s out there. But remember products don’t offer these niceties for free. Expect to pay for flexible features with a slightly higher interest rate. So don’t be tempted to go for attractive features unless you will actually use them.

It no longer does what it said it does

If you are one of the millions of people in the UK who have been told to expect a shortfall on their endowment policy then you need to act now. You will still be responsible for paying off your mortgage on the due date, even if your investment has performed miserably. It’s your problem, not your lenders. If you have an endowment mortgage then your monthly payment does two things. Some of the money goes to your lender to cover the interest on your loan. The rest is paid to an insurance company which invests it on your behalf. What you are not doing is paying off any of the capital you owe. So if you borrow £100,000 on an interest-only basis, you will still owe the bank £100,000 25 years later. If you’re lucky the money you have invested will have grown sufficiently for you to use it to pay off some or all of your mortgage. But in recent years most insurance companies have cut the bonuses they pay investors with endowment policies, which mean the money invested is unlikely to cover the mortgage debt, leaving policyholders with a shortfall. If you are in this position, it may make sense to convert some or your entire loan to a repayment mortgage to make sure that you’ll be able to clear the outstanding balance. This will cost more every month because as well as covering the interest you owe, you will also be paying off some of the capital. You then either cash in your endowment and use the lump sum to pay off some of your mortgage or keep it going as a separate investment. Deciding what to do with your endowment can be complicated, especially if you are relying on the life insurance provided by the policy, and you might need to take some specialist financial advice before deciding what to do. Many people with ISA or pension mortgages face the same uncertain future. Bad investment returns could mean they also struggle to repay their loans. Some estimates suggest there could be another million people who have interest only mortgages but don’t have even a badly performing investment to rely on. Some people plan to sell their house to pay the debt, assuming the property value will have grown sufficiently in the meantime to leave them a tidy surplus. But that’s not guaranteed, and in every case it does make sense to consider converting at least a portion of your loan to a repayment basis when you can. I always shiver slightly when people talk about adding non housing debts to their mortgage, whether it’s for a new kitchen, a holiday or to consolidate existing borrowing. My problem isn’t that it is wrong per se, in fact often it’s a good move, but the issue is many people see it as a win win solution. Let me make something plain.

Borrowing at 10% over 5 years is cheaper than 5% over 20 years.

The amount of interest you pay is a combination of the rate and the length of the borrowing. Borrow on your mortgage and your overall interest you pay will usually substantially increase. There are times when this could be a necessary evil, perhaps to get you out of a hole, but it’s usually better to pay a slightly higher rate with the flexibility to pay off the debt much more quickly. The one exception is if you’re using this strategy in conjunction with a mortgage which allows overpayments (more later) so you are actually paying the debts off in much less time.

You’ve got other debts elsewhere which charge much higher interest rates and you want to consolidate all your debts into one

If you have a lot of outstanding debts it might make sense to add them to your mortgage loan. After all, the interest rate you pay on your mortgage is probably half or even a third of what you pay on your other debts. But this is not something to do lightly. Remember you are securing this money on your home, so if at some point in the future you can’t make your repayments; your house is at risk. And, of course, if you borrow more and use the cash to pay off your credit card or bank loan, you will pay be paying interest on that extra money for as long as you have the mortgage. Despite the potential savings available, there are some people who probably shouldn’t remortgage. It’s all a question of money, timing and your own personal circumstances. Essentially you have to decide whether the savings available at the point you’re considering switching deals will outweigh the cost. Think carefully if you fall into one of the following categories:

The lucky ones

You may be already on such a fantastic deal that you’d be mad to move. But don’t get too comfortable, chances are it won’t always be top of the tree so eventually you’ll need to consider hopping on board the remortgaging merry go round. And it’s worth doing some checks so you have the peace of mind that you’ve got the best deal possible.

The unlucky ones

Alternatively you may be on such a terrible deal that has you locked in with such horrendous penalties that it’d be utter foolishness to move before the end of the term. But if you are on a really rubbish deal, then it’s all the more important that you do move as soon as you can. So do your homework, and be ready – and try not to think about how much money you’re wasting every month in the meantime. It’s possible your current lender might be persuaded to let you switch to another of its deals by paying a reduced early repayment charge. You’re unlikely to get to move to its top of the range deal but as long as it’s better than the one you’re currently on, and doesn’t lock you in for much longer, you have nothing to lose.

To Summerise…

Just because you’ve remortgaged once doesn’t mean you should forget about it. Today’s best deal could have tumbled from the best buy tables in six months time. If you want to keep saving you need to keep your eye on the market. In particular, if you’ve chosen a rate for a period of time, say two years, then ideally you need to start thinking about checking your rate is still decent at least three months before your time is up. Timing is crucial. Don’t let yourself forget and risk wasting the money you saved by remortgaging in the first place. Put a reminder in your diary or in your computer calendar.

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