Avoid remortgage pitfalls

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.