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Finance and re-mortgaging

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Re-mortgaging your property

Do you have an existing mortgage that is fixed for a set number of years? Do you know when it expires? Many people forget or don’t realise when their mortgage rate switches to the standard variable rate and therefore possibly start to pay far more for their mortgage than they have to. Remortgaging involves switching your current mortgage to a new deal either with a new or your existing lender. There are many reasons that you may consider taking this step – the main one is simple; it may save you money.

Advisors offer a re-mortgage service whereby they will contact you six months prior to your mortgage expiring and advise you on the best possible rate for you to switch to straight after.

For most people, a mortgage is their biggest financial commitment. It therefore follows that streamlining the largest debt can produce the largest savings. If you are paying the lenders standard variable rate (SVR) on your current mortgage, then you are almost certainly paying too much.

Imagine you had a repayment mortgage for £100,000 and were currently paying 4% interest. If you move halfway through your 25-year term to a 2% deal then you would save almost £10,000. If you kept switching to the best deal every couple of years you save even more.

Bear in mind, you may not have to move your mortgage to another lender to be on a better deal; before you go anywhere, try challenging your current lender to give you a new and better offer – they will not want to lose your custom. However, if you do need to move lender, remember that you may have to pay various fees and legal bills to do so.

Using an Independent Mortgage Broker will save time and effort in the search for the right lender for you. They have access to thousands of mortgage products on the market and will be able to guide you through any fees, charges and legal bills that may occur. Remortgaging may not always be about saving money; it may also be about getting a mortgage that is right for you and your circumstances.

Reasons to consider re-mortgaging

  • A change in income – you may have received a pay rise, or maybe inherited some money and would like to make extra payments or pay a lump sum towards your mortgage but your current deal does not allow this.
  • A change in circumstance – you may need the flexibility to miss a few mortgage payments due to changing jobs, going travelling or back into education.
  • Release equity for another purpose – you may want to embark on a new business venture and release some funds to start up.
  • Home improvements – you may need to release some money and add an extension or conservatory to your property.
  • Consolidate debts – you may need to release some of the equity you hold in your home and consolidate other debts, such as a car loan or credit cards. Think carefully before securing other debts against your home.
  • Alter your mortgage – you may want to reduce your mortgage term from 25 years to 20 years or increase it from 20 to 25 years.

Reasons to not re-mortgage

  • Already competitive – your existing mortgage deal is already very competitive and there is no cost benefit in switching to a different lender.
  • Penalties – your existing mortgage may have large penalties for leaving that it would make it foolish to move before the end of the mortgage term.
  • Outstanding amount – your existing mortgage amount may have fallen below a certain amount e.g £30,000 and it may not be worth switching lender simply because the amount you will save is very unlikely to outweigh the cost. Some lenders may not even take on a mortgage of that size.

Types of re-mortgaging

Interest or Repayment?
With an interest-only mortgage, you only pay the interest on the loan, so the balance of your debt remains the same. Repayment is the only option that guarantees that you are actually paying off some of your debt every month.

Note: Unless you have a very good reason, repayment should be the way forward. The sooner you start paying off your mortgage the sooner you’ll finish.

Standard Variable Rate (SVR)
The lender’s variable rate (often referred to as the ‘standard variable rate’ or SVR) fluctuates and will generally follow the direction of the Bank of England’s monthly base-rate changes. SVRs are generally a couple of percentage points or so higher than the base rate. As the Bank of England shifts its rate up and down, lenders move their SVRs accordingly. But beware, lenders do not have to pass on the full change for example: If the Bank of England cuts rates by 0.5% your lender might only change its rate by say 0.35%.

A tracker rate mortgage is occasionally linked to the lender’s variable rate but most commonly linked to the Bank of England base rate. The tracker follows the Bank of England base rate with a discount or a premium (or even sometimes at the same rate as Bank of England base rate) for a period of time. In this instance, any reduction will be passed on in full, which is not always the case if your rate is linked to the SVR. Some trackers, but not all, come with tie-ins.

Many lenders offer a discount from their SVR. For example, if you were offered a 1% discount off the lender’s variable rate of 5%, your rate would be 4%. It is important to note that your rate will also have the potential to go up and down with the SVR. The period over which the discount is available will vary. You will be tied in for as long as the discount rate applies and possibly beyond.

A fixed rate mortgage allows you to set your rate at a certain level for a given period of time. So regardless of whether the lender’s rate changes up or down, your payments remain the same. Again, you will be tied in for as long as the fixed rate applies and possibly beyond.

Capped-rate mortgage
A variation on the theme of the fixed rate above is a capped rate. The ‘cap’ really means that there is an upper limit on the interest rate you will pay. If the lender’s SVR rises above this limit, your rate will be unaffected, just as with the fixed rate. However, if the lender’s rate falls below the level of your cap, then your rate will fall. Again, you will be tied in for as long as the capped rate applies.

Cashback mortgage
To attract your business, you may be offered a cash incentive or ‘cashback’, which is payable on completion of the loan. However, this type of mortgage may only be offered to you by linking it to the lender’s SVR.

Flexible mortgage
A flexible mortgage offers the facility to underpay or overpay or even take payment holidays. It also allows you to borrow lump sums back from your loan free of additional arrangement fees. There are often no tie-ins with flexible loans, meaning you can redeem the mortgage at any time without penalty. A true flexible mortgage will calculate your interest on a daily, not an annual basis.

Offset mortgage
An offset mortgage takes a flexible mortgage one stage further and comes with all the flexible features described above but in addition, offsets your savings – which must be transferred into an account with the lender – against the debt of your mortgage. For example, if you had £5,000 in savings and a mortgage of £100,000, you would only pay interest on the remaining balance of £95,000. The reduced interest you pay as a result of this arrangement means a shorter loan term. You will not receive interest payments on the credit balance of your savings but this means you will not pay tax on that interest either. Also, the interest you are forfeiting on your credit balance is nearly always lower than the rate you pay on debt balances. However, offset mortgages work most effectively if you have considerable savings – something that many first-time buyers might prefer to put towards a deposit. Interest rates on offsets can also be more expensive.

Current account mortgage
A current account mortgage is also completely flexible and works along the same lines as an offset mortgage. The main difference is that all balances are thrown into one big pot rather than being kept in separate accounts. You are also able to incorporate credit cards and personal loans into the pot. So, if you had a total debt – including your mortgage of £130,000 and savings of £5,000 your balance at the ATM machine would read £125,000 overdrawn. But all debt is charged at cheaper mortgage rates and all credit is offset against this debt, further reducing its cost.

The costs involved

Although re-mortgaging may save you a lot of money, there are costs you will have to take into account. You will need to bear in mind any early repayment charges that may apply on your existing mortgage and the extent to which these may reduce the potential savings to be gained by re-mortgaging. It is important to work out the repayment costs carefully, because even if you move to a new lower rate, it may be many years before you receive any real benefit. The following costs may be involved:

Early repayment charges
If you have an existing fixed, capped or discounted rate mortgage or if you have a cash back mortgage there is a possibility that there is an early repayment charge (ERC) which will apply on your loan. Typically you will have to pay your existing lender a number of months interest should you wish to cash in the loan before the end of the ‘tie-in’ period.

Be careful of any overhanging ERC’s which may be levied years after the fixed, capped or discounted rate period has run out.

If you have received cash back then you may be expected to pay some, if not all, of the money you received if you move your mortgage elsewhere.

Re-mortgage valuation fees and costs
As your re-mortgage will be secured on your home, the lender will want to make sure your home is worth the amount to cover the loan and that the property is in good condition to lend on. Therefore they will need a survey or valuation to be done, and this cost will generally have to be paid by you. Some lenders, however, may offer free valuations as part of their mortgage offer.

Legal fees
When you switch your mortgage lender there will need to be some conveyancing work done by a solicitor. The good news is that the work involved is much simpler than when you buy a home and so, the solicitor’s fee will also be smaller. Some re-mortgage deals will pay the solicitors fees for you.

Lenders arrangement fees
You should expect to pay a lenders arrangement fee. These vary from lender to lender and have been increasing over the past 12 months. The amount of the fee can be added to your loan, which seems attractive in the short term, but you need to question whether you really want to pay interest on it for as long as you have your mortgage.

Higher lending fees
If you plan to borrow a high proportion of what your home is worth, say 90% or more, you have to pay a higher lending charge. This is a form of insurance for the lender, to compensate them for the increased risk they take on when lending at a high loan to value.

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