Slash your monthly spending by remortgaging
With mortgage rates falling to all-time lows, there has never been a better time to hunt around for a cheaper deal. If the Bank of England finally starts raising interest rates - and it has recently been firing warning shots - there may never be a better time again. So, homeowners, what are you waiting for?
Remortgaging is one of the best ways to slash your monthly spending, with potential savings running into thousands of pounds a year, especially for those with larger home loans.
And with the best two-year fixed rates charging less than 1.5%, and five-year fixes at under 2.5%, homeowners sitting on their lender's standard variable rate (SVR) have a big incentive to act.
Homeowners are waking up to the savings, with more than 36,000 remortgages in May, a jump of 10% on the previous six-month average, according to the Bank of England Money & Credit report.
Brian Murphy, head of lending at broker the Mortgage Advice Bureau, says the remortgage market has sprung back into life. "Low mortgage rates and rising house prices are giving many homeowners a stronger incentive to switch their loan than they have had for years. The best prices are available to borrowers with the most equity in their homes."
So there are good reasons to remortgage but how do you actually go about getting a better deal?
Get in early
If you fancy moving to a cheaper deal, first check whether you will be penalised for doing so. Many mortgages carry hefty early redemption charges (ERCs) that can run into thousands of pounds.
These typically apply on discounted variable-rate and fixed-rate deals. So on a five-year fix you could face ERCs if you move at any point within five years of taking out the mortgage.
But don't wait until your current deal has expired before you start shopping around for something cheaper. David Hollingworth, broker at London & Country Mortgages. says: "Ideally, you should start your search several months beforehand, so you are ready to switch to a new deal the moment your old one comes to an end."
Otherwise, you will revert to the lender's standard variable rate. The average SVR is currently 4.55%, according to the Bank of England, but some can charge closer to 6%. You have to give yourself enough time to complete the lender's underwriting, get your property valued and finish all the legal work.
Just a few months sitting on a pricey SVR can cost you dear, so it pays to be ready to move on, Hollingworth says. "Set it up so completion takes place as soon as your existing deal is penalty-free."
Switching to another deal with the same lender may be quicker but this isn't always the case. Hollingworth adds: "If you're looking to make changes such as borrow extra funds, lengthen your mortgage term or alter your repayment method, you might have to go through your lender's full underwriting process anyway."
If you spot an attractive rate, it makes sense to lock into it before the lender pulls the deal.
But don't start hunting around too soon. Most mortgage offers are only valid for a limited period and you don't want your offer to expire before ERCs on your old deal have run out. Hollingworth explains: "The broad rule of thumb is that it's good to start shopping around roughly three months before your current deal ends."
There are slight variations, depending on the lender. For example, remortgage offers from Nationwide are valid for 90 days from the day the offer is issued, while NatWest differs slightly at three months, and Virgin Money gives you 16 weeks.
Coventry Building Society's remortgage offers are valid for four months but the countdown starts from the date of application. Woolwich also starts counting down from the date of application but its offers are valid for six months.
The picture is further complicated by the fact that some lenders set completion deadlines instead. Hollingworth says: "Santander, for example, currently has a completion deadline of end of October for its remortgage deals, while Halifax has set its completion deadlines at the end of December."
They are many variables, which constantly change over time, Hollingworth says. "Completion deadlines may look generous initially but they can quickly start to erode, so factor in the processing time."
Simon Tyler, managing director at brokers Tyler Mortgage Management, warns the process of taking out a mortgage has become more long-winded due to stringent new regulatory rules introduced in April last year, known as the Mortgage Market Review (MMR).
The MMR forces lenders to ask more intrusive questions about your spending habits, to see if you can afford the deal. Lenders must also stress-test your application to ensure it will still be affordable when interest rates start rising.
The key is to allow enough time to overcome any hurdles before the deal ends – three months should do it.
Going for broke
If you are used to buying products such as car insurance, investments and credit cards on the net, you may be tempted to search for a mortgage online. But there are good reasons to consider using a broker instead.
The MMR has complicated the application process, driving more people to take advice. Older people, the self-employed and contract workers, in particular, may need help.
With more than 13,500 different mortgages on the market, it is easy to be blinded by choice. Furthermore, many specialist lenders will only accept applications made through brokers.
Brian Murphy at the Mortgage Advice Bureau says a good broker will know which lenders are most likely to accept your application: "They can also alert you to leading deals across the market and follow-on products from your existing lender."
You may have to factor their fees into your calculations. Some, notably London & Country Mortgages, don't charge any fees, but earn a fee from the lender whose deals they recommend.
Mortgage Advice Bureau charges a typical fee of 0.3%, which would cost £300 on a £100,000 remortgage. This varies according to personal circumstances, and can rise to 1% for more complex cases.
Brokers are obliged to set out all your costs in advance, so understand what you are paying.
For larger mortgages, a flat fee will make more sense than a percentage charge. Just make sure broker costs don't wipe out the savings from remortgaging.
There are some tricks you can use to get a better mortgage deal. Mark Harris, chief executive of broker SPF Private Clients, says the more spare equity you have in your property, the cheaper the mortgage you can get. "If you have savings in the bank, consider using them to shrink your mortgage to secure a lower rate." Just make sure you have enough cash left by in case of financial emergencies.
Under MMR, your lender will want to examine your bank statements to check you can afford the loan. Harris says: "Cut back on unnecessary expenditure in the months before your remortgage, and pay off any loans, credit card balances and overdrafts, to ensure you meet the lender's affordability criteria."
Before granting you a remortgage, your lender will want to value your property as security for the loan. This used to involve dispatching a valuer to your home. Increasingly, the report is computer-generated, known as a desktop or drive-by valuation.
Adrian Anderson, director of mortgage broker Anderson Harris, says: "Lenders are more likely to opt for a computer-based valuation for loan-to-values (LTVs) below 50% and loans under £500,000." A computer valuation is quick, convenient and works well for homeowners with standard properties.
But it can backfire with properties that have unique or desirable features, where an internal inspection would attract a higher valuation, allowing the owner to get a cheaper, lower-LTV loan.
Simon Checkley, managing director of brokers Private Finance, says your home needs to be habitable to get a mortgage. "So if you are doing extensive building works, this could reduce your chances of getting a deal." If you are in this position, a computer valuation may suit you better because there is no internal inspection.
Checkley says a good broker can point you towards lenders that either favour computer or visit-based valuations, depending on which is right for you.
It is worth tidying up your home before the valuation, clearing out the clutter and fixing the most glaring problems to create the best impression. Be prepared to challenge your lender if you feel it has undervalued your property. If a similar property in the same area recently sold for a higher price, that will help your case, so do your research.
The back end
Don't just look at the initial pay rate when taking out a new mortgage, check what happens when the deal expires - too many deals have eye- catching headline rates that revert to a sky-high SVR after a couple
Mark Finnegan, director at broker Complete Mortgages, says: "Accord Mortgages, for example, now offers a fixed-rate mortgage at 1.39%. But after two years, it reverts to an SVR of 5.79%, which could soon wipe out your gains in a matter of months."
Somebody borrowing £185,000 on the Accord deal over a 25-year term would pay £730 a month initially but this would leap to £1,168 after two years, costing an extra £438 a month.
Finnegan says that if you are still tempted, you must be ready to move on the moment the initial rate expires. But be warned: this could prove tricky if your circumstances have changed, say, if you want to borrow at a higher LTV, which may be necessary if property prices fall.
So remember: remortgaging can bring great rewards but it also carries risks, so make sure you understand all your options and speak to a good mortgage broker if in doubt.
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Early redemption charges
You may think a lender would be grateful to you for paying off your debts early. Alas, no. Mortgages and loans levy early repayment (or redemption) charges because the profitability of your loan or mortgage to the lender is calculated on the basis that you’ll pay every payment (see APR). To pay the loan/mortgage off early – even to remortgage – means the lender will make less profit and so claws back potential lost profit with an ERC, which could be three months’ interest. The earlier into the term you repay the loan, the higher the ERC might be.