Remortgaging could save you £1,200 a year
Mortgageholders are missing out on substantial monthly savings - up to £1,200 a year - because they never remortgage, claims Barclays.
Other than when moving home, 58% of homeowners have never switched mortgage deals, yet, depending on the deal, they could save more than £100 a month, according to a survey by the bank.
A homeowner would pay £858.63 a month, based on a 25-year £150,000 mortgage from any lender, with a standard variable rate (SVR) of 4.79%. Remortgaging to Barclays great escape two-year fix at 3.49% would see monthly payments drop to £750.13 - a saving of £108.50 a month.
"The fact that around six in 10 homeowners have never changed their mortgage outside of moving house suggests that they simply don't realise the level of savings to be made by remortgaging," says Andy Gray, head of mortgages at Barclays.
Barclays estimates in total there are more than 900,000 homeowners on a SVR with no early repayment charges who are failing to capitalise on changing mortgage deals.
"As monthly outgoings rise, and Brits fight to cut their costs, it's important that [homeowners] consider addressing their mortgage," says Gray.
In the same Barclays survey, 44% of respondents claim to have spent more time on money saving measures in the past 12 months than ever before but these efforts are concentrated on everyday expenses such as food and clothes.
Make the switch
If you haven't yet considered changing mortgage deals, here are some pointers to get you thinking.
Never stay on the SVR
The standard variable rate is the interest rate that mortgages revert to at the end of fixed terms or introductory offers – meaning it's always that bit higher.
Look at the LTV
When comparing prospective mortgage offers, don't forget to look at the loan to value ratio: this is how much the mortgage lender is willing to lend and how much it expects the borrower to stump up themselves. The higher the LTV, the better the deal.
With remortgaging it's slightly different because you don't need an initial deposit and should therefore need to borrow less money, but lenders will still want to assess the risk of lending to you and your financial situation will determine whether you can access deals with lower LTVs or not.
To fix or not to fix?
While the base rate remains at 0.5%, fixed-rate mortgages and tracker deals look attractive because the interest you pay is pegged to the low base rate.
Of course, there is always the danger that you fix and after a year more competitive offers come onto the mortgage market. And your tracker deal will increase dramatically when the base rate finally goes up.
It's worth talking to a professional mortgage adviser – ideally not one attached to your bank or mortgage lender – to help you decide.
Loyalty doesn't pay
There's no reason to stick with your existing lender unless it can come up with a competitive mortgage deal. Lenders rely on borrowers ‘misplaced sense of loyalty' to keep them paying higher SVRs. Go to the provider with the best deal.
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.
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.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.