Tempted to stick with your existing lender rather than go through the whole process of finding a new mortgage? Then think again – you could be paying over the odds. If your first mortgage deal has come to an end, then it’s time to shop around.
First-time homeowners coming to the end of their mortgage term need to shop around for a new deal or risk their monthly repayments rocketing.
For many first-time buyers who have taken their first foot on the ladder in the past few years, this will be the first time they will have had to remortgage and it’s important not to put it off.
Yorkshire Building Society says almost 30% of its mortgage deals which matured in 2017 were on homes bought by first-time buyers. Chris Irwin, senior mortgage manager at Yorkshire Building Society, explains: “There have been a number of beneficial conditions in recent years - such as housing availability, the launch of initiatives such as the Help to Buy Scheme and a low interest rate environment - which have enabled would-be homeowners to take their first step onto the property ladder.
“As first-time buyers have likely been encouraged to purchase a property during this time, they have naturally come to the end of their initial deals, as indeed many borrowers did during last year’s largest mortgage maturity period since 2012."
Don’t get stuck on the variable rate
Homeowners who don’t re-mortgage are automatically moved to their lender’s Standard Variable Rate (SVR), which usually has a higher interest rate than they would be able to get on a new deal. This can lead to monthly repayments leaping considerably.
It’s widely reported that some two million homeowners are thought to be languishing on their lender’s SVR currently, which means many will be shelling out far more in monthly repayments than they need to. It is estimated that these homeowners may be paying out £4,500 a year more than necessary because they have not switched to a new deal.
Figures from comparison website Moneyfacts show that, at the time of writing, the average SVR is 4.73%, almost double the typical two-year fixed rate of 2.5% and considerably higher than the average five-year fixed rate of 2.91%.
It says borrowers moving from the typical two-year fixed rate to the average SVR could find their monthly repayments soar by more than £180.52 a monthly.
Charlotte Nelson, finance expert at Moneyfacts, says: “Ideally borrowers should start the search for a new deal a few months before their current one ends so that everything moves swiftly and you avoid the high SVR.”
Remortgaging might sound complicated but it’s often easier than securing an initial mortgage loan, particularly if you stay with your existing lender and you could end up reducing your monthly repayments. Figures from Yorkshire Building Society show that 87% of its first-time buyers who transferred to a new mortgage at the end of their deal moved to a better rate.
Pete Mugleston, director at Online Mortgage Advisor, says: “When the only experience of getting a mortgage was buying a home – one of the most stressful events one can face – first-time buyers can be forgiven for feeling daunted by the prospect of looking for a new deal.
“But the truth is remortgaging involves far fewer hoops to jump through and, of course, there is no chain or contract negotiations to worry about.”
Your lender will get in touch when your current deal is due to expire but you don’t have to wait until the end of your mortgage term to move.
Many lenders will allow you to transfer to a new deal up to six months before your current one ends. This is particularly useful if you are worried that interest rates will rise and want to lock in a lower rate now.
However, this is not always the case and it is vital to check whether you may be liable for any early repayment charges by trying to move too soon, which could be costly.
You don’t have to stay with your current mortgage provider, but it’s worth finding out whether it offers any better loyalty rates to existing customers who do stay put.
Jonathan Clark, partner at mortgage advisory firm Chadney Bulgin, says: “It’s important to check across the whole market when selecting a new mortgage to be sure you’re getting the best deal possible.
“Switching to a new lender is potentially more complex but can sometimes mean you get a significantly better rate. Crucially, no borrower should be paying a lender’s standard variable rate without very good reason.”
A mortgage lender will want to check your ability to repay hasn’t changed since you first took out your loan, so it’s important to have as much information to hand as possible when you start the remortgage process.
Lenders will be particularly interested to hear about any changes in your circumstances such as a new job, a change in salary or any new children, as these could affect how much you can afford to repay.
Comparison websites and online affordability calculators can help to give an idea of how much you can borrow, but the actual amount will vary between lenders as they all have slightly different criteria.
These affordability checks may be slightly more relaxed if you stay with your current lender as it will already have evidence that you can manage your monthly repayments.
Work out the best deal
When it comes to picking a deal, it’s important to weigh up all the options. Longer-term fixed deals, for five or even 10 years, may have slightly higher interest rates but will offer peace of mind for the future. These may suit owners who know they will not be moving any time soon and want surety over their monthly repayments.
The lowest interest rates available may seem attractive because they mean lower repayments, but many often come with hefty product fees, which can make them more expensive overall. Be sure to calculate the so-called total cost of the mortgage, which factors in all the charges, and not base your decision on a low headline rate.
Other deals may offer incentives such as cashback or free valuations but, again, it’s important to factor in whether these save you enough money to warrant a higher interest rate over the length of the deal.
Check your equity stake
House price changes in your area may mean you have more or less equity in your home than when you bought it.
For example, if your property was worth £200,000 when you bought it and you put down a deposit of £20,000, you would have had 10% equity in your home at the time.
If the value of the property has now risen to £220,000, your equity would have grown to around 18% - excluding the mortgage repayments you’d have made over the term. This is because the value of the property has increased while the amount you owe against it has got smaller, meaning you own a greater proportion of the home.
Typically, the more equity you have, the more competitive the rates available to you. Lenders usually re-evaluate the value of your home on a regular basis based on house price indices, but if you disagree with its valuation you can pay to have an independent valuation carried out – this typically costs as little as £150.
Mr Irwin says: “A mortgage is usually for a significant period of your life, so it’s important to ensure that it is working in your best interests.
“Many first-time buyers are reviewing their mortgage as they approach the end of their deal and it’s important others follow their lead and don’t get complacent, or they risk not ending up with the best deal.”
‘I’ll do my research before I jump in’
Stef Boydon, who works in finance, bought her first home in 2013; a three-bedroom, semi-detached home near Peterborough in Cambridgeshire, for £112,000. She took out a five-year fixed deal with an interest rate of 2.49% with Yorkshire Building Society, which comes to an end in September this year.
The 29-year-old is now hoping to buy a new home with her boyfriend, Dan, using any equity she has in her current property as a deposit on the new one. She has already had her house valued and was pleased to find out it had increased in value since she bought it, meaning she’ll have a larger deposit for her next purchase.
With interest rates looking likely to rise, she likes the idea of locking into a fixed rate on any future mortgage, so she can be sure of what her monthly repayments will be.
Stef says: “I was a bit wide-eyed when I bought my house and perhaps didn’t choose the best deal for my circumstances. But having been a homeowner for five years, I feel that I am a lot savvier now and I’m going to do my research before I jump into anything.”