Remortgaging accounts for a huge chunk of UK consumer lending. What is it and what are the pitfalls? A leading mortgage expert explains.
All too often people hear the word remortgage and associate it with taking on more debt.
While remortgaging can help people to fund home improvements at cheap interest rates, it is not necessarily about building up a larger loan. It's more about achieving the cheapest mortgage.
Remortgaging simply means that the mortgage is switched from one lender to another, to get a better deal, without moving home.
Why remortgage?
Mortgages are the single biggest financial commitment that most of us face, yet it's often an aspect of our finances we rarely review.
Many of us are old hands at shopping around for the cheapest car cover but the savings are likely to add up to tens of pounds, not the thousands a spring clean of your mortgage could easily yield.
Usually you start out on an attractive rate which will later revert to what is known as the lender's standard variable rate.
Standard variable rates can be around 5.50% from many of the large lenders, although they do vary.
With current two-year mortgage products available well below 4%, switching to a new deal can be extremely lucrative.
For example, if a borrower with a £100,000 interest-only mortgage switched from their existing lender's standard variable rate to a deal 2% lower, they would slash £167 off their monthly mortgage payments - making a saving of £4,000 over two years.
Where should I start?
First, check that remortgaging makes sense for you - you might still be in a good deal or you might be locked in with redemption penalties.
All this can be checked from your original mortgage offer or, failing that, by contacting your existing lender.
Even if you do have a redemption penalty it may still be worth remortgaging as the savings could outweigh the penalty of the remaining lock-in period.
Your existing lender may offer you a better rate than the one that you're already on but make sure you compare this with the best products on the market, as it is unlikely to be the best you can get.
How do I find the best deal?
Shop around to find the best rates - it will not necessarily be the bigger lenders that offer the market-leading deals as products change all the time.
The internet and national newspapers often carry best buy tables of mortgages which can be a useful information resource.
Alternatively, seek the help of a fully independent broker who can advise you on the right type of mortgage for you and search the whole market for the best deal.
What should I look out for?
As well as looking out for costs like redemption penalties that lock you in with you current lender, pay attention to fees that may be attached to the new product, such as arrangement fees - which usually cost around £300.
The lender also needs to value the property to ensure it's adequate security for the new mortgage; and some legal work will be necessary to make the switch.
In addition some brokers may charge you a fee of up to 1% of the mortgage.
In today's competitive market lenders often offer products that cover most or all of these costs to get your business, and some brokers charge nothing for their advice.
It can often work out cheaper to opt for a deal without set-up costs and pay a slightly higher rate, particularly for those with smaller mortgages.
A quick rule of thumb would be that anyone with a mortgage below £100,000 should look for a 'fees-paid' deal.
If you have a bigger mortgage, then crunch the numbers on whether paying fees makes sense.
In addition to watching the costs, make sure that you are not picking a deal that appears extremely cheap at first, only to find the rate increases after a couple of years and you're locked in with heavy penalties, which are known as extended redemption penalties.
How long will it take?
While remortagaging means minimal hassle for the borrower these days (e.g. valuers often don't need access to the property), there's plenty of work going on behind the scenes.
The whole process to completion will take a couple of months, but make sure you provide any required supporting documentation promptly to avoid unnecessary delay.
Once you have completed your new mortgage make a diary note to review the new deal two to three months before it ends, so you can implement a seamless switch to the best deal around at that time.
Monday 2 November 2009
Moving your mortgage
Thousands of people switch mortgage provider each year, some to save money, others as a means to borrow more cash.
What factors should you bear in mind when switching mortgage providers.
Can remortgaging really save money?
It depends.
It is estimated that more than half of all borrowers are continuing to pay over the odds for their mortgage each month.
Usually these people are paying the lender's standard variable mortgage rate. There will be lower rates available from other providers.
But this is not the whole story.
In recent years, banks and building societies have been hiking mortgage fees to subsidise attractive headline interest rates.
So called mortgage arrangement fees have sky-rocketed as have charges for redeeming a mortgage.
As a result, you have to do the sums to make sure that what you gain through switching provider - a lower rate of interest - is not lost through higher charges.
That sounds very complex, what help is available?
There are financial professionals who can advise you. Some of these are employed by lenders and may only be able to recommend the products of one mortgage provider or a small panel of providers.
A financial adviser may not be the best route to a future mortgage deal.
But there are a host of independent mortgage brokers who are free to advise you from the whole of the mortgage market.
However, be aware that they may take commission from the provider they recommend to you.
You may also have to pay a fee for independent mortgage advice.
It is also wise to do your own research to compare the rates that a lender or broker is offering you.
If I want to do it myself, where do I start?
The first step is to check the terms and conditions of your existing mortgage.
These will tell if you are tied-in to your mortgage deal or if there are any redemption penalties - sometimes phrased as early repayment charges.
If you are locked-in, you must decide if it is worth switching to a different rate or stay put until the penalties have expired.
You may have been with your existing lender for a long time and feel a sense of loyalty towards the company.
However, most lenders do not reward this loyalty with a reduction in rates.
You should therefore expect to shop around and look towards a different lender to get a better deal.
My neighbours have told me that you can borrow more money through remortgaging, is this right?
Yes. Remortgaging is not only about saving money.
As well as reducing your monthly payments, you can also use remortgaging as a way of releasing some equity that has built-up in your property's value.
If you are tempted to release equity, it is still important to be cautious.
Borrowing through your mortgage may be much cheaper than taking out a personal loan, but the debt is secured.
This means that if you can not keep up with additional payments, you could risk losing your home.
Which deal is best for me?
You will face a choice of broadly four types of deal: fixed, capped, discounted and flexible.
Fixed-rate mortgages are ideal for people who want certainty and must be able to regulate how much they will be spending each month.
The rate is usually fixed for between two and five years.
Discounted loans offer a reduction off the standard variable rate for a set period.
If rates fall further, the rate that you will pay will also go down.
However, when rates rise, so will your mortgage payments.
A capped-rate loan will set a limit on the rate you will pay.
If rates rise, your payments will not go above that level. However, if rates fall below the cap so will your repayments.
Flexible mortgages allow you to overpay and underpay when you choose and without penalty.
This is ideal for people who have fluctuating incomes or who want to clear their mortgage early.
An increasing number of fixed, capped and discounted deals have more flexible features as well.
What should I avoid?
Avoid deals with extended redemption penalties.
While these had been phased out in recent years, a number of lenders have reintroduced extended penalties to clamp down on so-called 'rate tarts' who move around frequently to get the best deal.
Extended redemption penalties are often hidden in the small print of a mortgage contract and are sometimes called early repayment penalties or charges.
Before you agree to a mortgage you should be presented with a key facts document. This should outline all the mortgage charges and small print in plain English.
Always read the key facts document thoroughly and if you are unsure of any clauses take advice.
How do I apply?
Obtain a 'redemption statement' from your existing lender.
This will tell you how much you owe.
You must then complete an application form from your new lender, along with details about your income such as bank statements, payslips, a P60 form, mortgage statements and proof of identity.
Your new lender will value your home. This will cost between £200 and £300.
Most lenders will also charge an arrangement fee which can be anything from £200 up to over £1,000.
Some lenders offer dedicated remortgaging services with free legal work and valuations but others will charge for this service.
All in all it can take anything from a few hundred pounds to a few thousand to shift provider.
The golden rule is that the benefits of switching provider must outweigh any charges that are incurred.
How long does it take?
It should take about a month to complete the process.
You will get a mortgage offer of advance, if the lender's surveyor is satisfied with the value and condition of your home.
You new lender will liaise with your existing company.
Once you have received a completion statement from your solicitor or new lender, the process has finished.
What factors should you bear in mind when switching mortgage providers.
Can remortgaging really save money?
It depends.
It is estimated that more than half of all borrowers are continuing to pay over the odds for their mortgage each month.
Usually these people are paying the lender's standard variable mortgage rate. There will be lower rates available from other providers.
But this is not the whole story.
In recent years, banks and building societies have been hiking mortgage fees to subsidise attractive headline interest rates.
So called mortgage arrangement fees have sky-rocketed as have charges for redeeming a mortgage.
As a result, you have to do the sums to make sure that what you gain through switching provider - a lower rate of interest - is not lost through higher charges.
That sounds very complex, what help is available?
There are financial professionals who can advise you. Some of these are employed by lenders and may only be able to recommend the products of one mortgage provider or a small panel of providers.
A financial adviser may not be the best route to a future mortgage deal.
But there are a host of independent mortgage brokers who are free to advise you from the whole of the mortgage market.
However, be aware that they may take commission from the provider they recommend to you.
You may also have to pay a fee for independent mortgage advice.
It is also wise to do your own research to compare the rates that a lender or broker is offering you.
If I want to do it myself, where do I start?
The first step is to check the terms and conditions of your existing mortgage.
These will tell if you are tied-in to your mortgage deal or if there are any redemption penalties - sometimes phrased as early repayment charges.
If you are locked-in, you must decide if it is worth switching to a different rate or stay put until the penalties have expired.
You may have been with your existing lender for a long time and feel a sense of loyalty towards the company.
However, most lenders do not reward this loyalty with a reduction in rates.
You should therefore expect to shop around and look towards a different lender to get a better deal.
My neighbours have told me that you can borrow more money through remortgaging, is this right?
Yes. Remortgaging is not only about saving money.
As well as reducing your monthly payments, you can also use remortgaging as a way of releasing some equity that has built-up in your property's value.
If you are tempted to release equity, it is still important to be cautious.
Borrowing through your mortgage may be much cheaper than taking out a personal loan, but the debt is secured.
This means that if you can not keep up with additional payments, you could risk losing your home.
Which deal is best for me?
You will face a choice of broadly four types of deal: fixed, capped, discounted and flexible.
Fixed-rate mortgages are ideal for people who want certainty and must be able to regulate how much they will be spending each month.
The rate is usually fixed for between two and five years.
Discounted loans offer a reduction off the standard variable rate for a set period.
If rates fall further, the rate that you will pay will also go down.
However, when rates rise, so will your mortgage payments.
A capped-rate loan will set a limit on the rate you will pay.
If rates rise, your payments will not go above that level. However, if rates fall below the cap so will your repayments.
Flexible mortgages allow you to overpay and underpay when you choose and without penalty.
This is ideal for people who have fluctuating incomes or who want to clear their mortgage early.
An increasing number of fixed, capped and discounted deals have more flexible features as well.
What should I avoid?
Avoid deals with extended redemption penalties.
While these had been phased out in recent years, a number of lenders have reintroduced extended penalties to clamp down on so-called 'rate tarts' who move around frequently to get the best deal.
Extended redemption penalties are often hidden in the small print of a mortgage contract and are sometimes called early repayment penalties or charges.
Before you agree to a mortgage you should be presented with a key facts document. This should outline all the mortgage charges and small print in plain English.
Always read the key facts document thoroughly and if you are unsure of any clauses take advice.
How do I apply?
Obtain a 'redemption statement' from your existing lender.
This will tell you how much you owe.
You must then complete an application form from your new lender, along with details about your income such as bank statements, payslips, a P60 form, mortgage statements and proof of identity.
Your new lender will value your home. This will cost between £200 and £300.
Most lenders will also charge an arrangement fee which can be anything from £200 up to over £1,000.
Some lenders offer dedicated remortgaging services with free legal work and valuations but others will charge for this service.
All in all it can take anything from a few hundred pounds to a few thousand to shift provider.
The golden rule is that the benefits of switching provider must outweigh any charges that are incurred.
How long does it take?
It should take about a month to complete the process.
You will get a mortgage offer of advance, if the lender's surveyor is satisfied with the value and condition of your home.
You new lender will liaise with your existing company.
Once you have received a completion statement from your solicitor or new lender, the process has finished.
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