When remortgaging you must first add up the total cost of all the fees, as sometimes, it may be cheaper to stay on your current deal.
Even if you move to a better rate, if the lender charges interest annually you could well be worse off. For example, if you had 10 years to go on your £115,000 mortgage, a 5.35% deal charging daily interest would actually be better value than a rate of 5% where interest was calculated annually. Are there any extended early repayment charges (previously known as redemption penalties)? If you go for a deal for a set period, say a 3 year fixed rate or a 2 year discount, you need to check what happens at the end. While most people accept they will be penalised for getting out of the deal during the initial period, it also used to be common for lenders to continue to charge early repayment charges after this, hence “extended”. These are gradually dying out but ensure you check and avoid like the plague. What happens if I need to move house within the term of the mortgage? Many mortgages are now portable so moving house doesn’t have to involve a new deal. However, if you need to extend your loan at the same time it may make sense to remortgage. If this matters to you, be clear about what you can and cannot do. Can I overpay/make underpayments? If this was a key reason for changing your mortgage, make sure any new deal will let you do what you want it to. Many mortgages restrict the amount of money you can overpay to a maximum of £500 a month or 10% of the outstanding mortgage per year. Penalties if you go over these limits can be steep. In some cases, although the extra money you pay is knocked off your outstanding debt for the purposes of calculating interest, the lender keeps the money in a separate pot. You can draw on this in the future, either by taking back a lump sum or using it to cover future monthly payments. Or maybe you want to be able to take a payment holiday. Some mortgages do allow this but, beware they don’t let you play truant from the goodness of their hearts. You will pay for it. Typically borrowers arrange to miss one or two payments, and their monthly payments are recalculated to spread the cost of the payment you missed over the rest of the life of your loan. There could also be an extra penalty or administration charge on top. Although remortgaging can save you a lot of money, there are costs you will have to pay. And these have risen sharply over the last few years. Pressure to keep headline interest rates down has meant that many lenders have increased the fees they charge borrowers who want to move to a new deal. It’s vital to make sure you’ll save more than you spend or there’s simply no point remortgaging. Some lenders will pay some or all of your remortgaging costs but you can expect to get a less competitive rate in return, so although it costs less, you save less too.
Mortgage regulation is supposed to ensure better disclosure of what deals cost to get in and out of, so in theory it should be relatively straightforward to crunch the numbers. Broadly fees fall into two categories, the cost of leaving your existing lender and the cost of joining your new lender.
Fees to leave old style Building Societys
If you remortgage before the end of a fixed rate or discount deal period, then you will have to pay an early repayment charge (previously known as a redemption penalty).
These tend to be on a sliding scale so the earlier you are in the deal, the more you will pay. On a 3 year fixed rate, you could be charged 3% of the loan amount if you immediately redeemed your mortgage, decreasing month by month to 2% at the start of the second year and 1% at the start of the third year. Occasionally you may be caught by extended early repayment charges after a deal has ended.
Remember you get nothing for free
Some lenders will waiver penalties in the last month of your deal if you move to another of their products. It’s always worth asking. Borrowers with cash back mortgages should also budget for a substantial hit. In some cases you could be asked to repay the whole lump sum you received if you redeem your mortgage within 5 years. You will also usually have to pay a mortgage exit administration fee. These have been around for a while, sometimes called deeds release, sealing or discharge fees, and are supposed to cover the administration costs when you pay off your loan. Many lenders had put these fees up in recent years – until what had tended to be a fairly small £50ish charge had jumped to over £200. Worse still, many customers were being told they had to pay it, even though their original mortgage agreement stated the smaller amount. In 2007 the Financial Services Authority announced a crackdown on this practice. A few lenders dropped the fee altogether but most just decided to reduce it back to the original level.
Warning! Arrangement fees.
Once a relatively minor part of your mortgage, these are now almost as significant a factor as the interest rate itself. This charge for getting a new deal can vary enormously from lender to lender. In recent years they’ve shot up ridicoulously where once £200-£300 was typical, now £500 is considered quite cheap and some lenders charge 0.5% to 1.5% of the mortgage value, which can be thousands. Whatever the fee, the amount can be added to your mortgage debt, which seems attractive in the short term, but it’s worth remembering this means you’ll be paying interest on it for as long as you have your mortgage. The reason for this is simple, by keeping the interest rate low their deals stay in the best buy tables, yet they increase prices by upping the fee instead. This has made comparing mortgage deals much more difficult. Never rely on interest rates alone, you must incorporate the arrangement fee into your overall costing. If you’re using a mortgage broker, they should be able to crunch the numbers for you. A few lenders will charge you a reservation or booking fee to secure a fixed rate, typically £100 – £200. This is almost always non refundable. It is also common to be charged a telegraphic transfer fee of around £30 to move the money on completion of the deal. You should also expect to pay a valuation fee for a survey of your property. This is to check a) it exists and b) that it offers the lender sufficient security for the loan. The cost varies according to property value and lender but it’s safe to budget at least £300. A small number of lenders will also charge you in the region of £30 if you refuse to take out their buildings insurance. This is usually worth paying to avoid being trapped with your lender’s preferred insurer which often hikes premiums after the first year. Remortgaging also incurs legal fees even if you don’t actually move house. Many lenders will pay some or all of these, although generally such offers don’t apply to borrowers in Scotland where a different legal process applies. In any case, you will have to use a solicitor approved by your lender. They’re unlikely to pay for your own solicitor to do the conveyance. If you have to pay for it yourself, you’re looking at around £500 – £600. If you are remortgaging because you are moving house, then remember you will also have to pay stamp duty land tax to the government. Even if your lender covers your legal fees, this won’t be included. By September 2009 there was no stamp duty payable on residential properties worth less than £175,000 (though this was a temporary increase from the usual £125,000 threshold), but 1% was due on properties worth between £175,000 and £250,000, 3% for those up to £500,000, and 4% for those worth more. Don’t forget if you use a mortgage broker you may have to pay their fees.
Is it worth it?
To establish whether it’s worth re-mortgaging, you need to work out whether the new deal in total is cheaper than the old one.
- Add up the cost of staying put. Work out how much you‟ll pay to stay where you are. This could be on your current rate, or it may be the standard variable rate if your current mortgage deal is ending. Just find out what the monthly repayments will be and multiply those monthly costs by the number of months your potential new deal will last to calculate the costs of staying put.
- Add up the total new deal cost. Now see what the monthly repayment will be with the new lender for borrowing the full amount and calculate the cost over the special offer period. If it‟s a two year deal, multiply by 24 to get the total two year cost. But make sure you also add the fees to leave your old lender and to join your new lender. Then compare the final figure to the cost of staying put to work out which is cheaper.