| Brief Guide to Remortgaging |
| Remortgaging |
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Remortgaging is about getting a better deal on your mortgage. You can do this by switching to another mortgage lender, or even by negotiating a new type of mortgage with your current lender. This can be an attractive proposition, especially if mortgage lenders are offering advantageous rates of interest to attract new customers. If you can find a mortgage interest rate that is 1.5% less than what you are currently paying on, say, a £100,000 mortgage, you may be able to save more than £1000 a year.
Worth the hassle? Actually, remortgaging is really not that difficult. So it could well be worth your while. But you have to do your sums and beware the pitfalls. There can be some nasty surprises in the small print. Caveat emptor! (Buyer beware!) |
| Equity release remortgaging |
| The term 'remortgaging' is also often used loosely to mean extending your mortgage to borrow a relatively large sum of money, using the value of your house as security. This is properly known as 'equity release', or 'equity release remortgaging'. As mortgage interest rates are relatively low compared to interest rates for other forms of personal loans, equity release can be the cheapest way to borrow money. It's the subject of a separate article, which can be found at briefguides.co.uk |
| In search of a better deal |
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Mortgages come in many shapes and sizes. When in pursuit of remortgaging, you have to hunt around for the best deal. The cheapest on offer is usually a mortgage with discounted variable interest (the interest rate changes in line with the current bank rate, but you pay a lower rate than the standard variable rate, or SVR). With mortgages based on variable rates, your payments will fluctuate with the pronouncements of the Bank of England. In periods of economic instability and high inflation, your interest rate could rise rapidly. For more security, you may want a fixed-rate mortgage (the interest rate is set at a fixed rate for a given number of years); or a capped-rate mortgage (the interest rate will move up and down, following the bank base rate, but will never exceed a given figure).
There are two common ways to pay back the loan: straight repayment (monthly payments of a portion of the loan, plus interest), or interest-only (only the interest is paid during the term of the loan, and then the full loan is paid off at maturity, usually through a parallel scheme such as an ISA or endowment policy). To calculate relative costs, see our mortgage calculator. Each option has its advantages and risks. You need to weigh these up and read the small print to make sure that what you will be getting really is better than what you already have. |
| Forfeits and penalties |
| You need also to check if there are any redemption penalties (or 'early repayment charges') or other 'tie-ins', attached to your current mortgage, that will have to be paid if you leave the scheme before the end of the contract. Fixed-interest mortgages, for example, often come with heavy penalties - amounting to several thousand pounds - for breaking the contract early. But it may be worth paying this penalty if the new mortgage offers a better deal in the long term. |
| Other costs |
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There will also be fees to pay. When you are switching to a new lender, your house will have to be surveyed and valued again, and you will need the services of a solicitor. For a mortgage of, say, £100,000, on a property valued at £250,000, the valuation and legal fees combined are likely to amount to between £500 and £750. Added to this, the new mortgage lender may well charge an 'arrangement fee' of £300 or more, and even an 'administration fee' on top of this. Most advisers reckon that the basic cost of remortgaging is about £1000.
Sometimes your new lender will undertake to cover these charges in order to attract your business (but then the mortgage rate is likely to be higher). |
| How to begin |
| Your first step should be to find out exactly where you stand with your current mortgage. Ask your current lender for a 'redemption statement', to find out precisely how much you still owe, and what penalties might be incurred if you switch lender. Also, find out what rate of interest you are currently paying. When you are negotiating a new mortgage, ask the mortgage provider for a Key Facts Illustration (KFI), which sets out the details of the proposal to a set formula: this will allow you to compare like for like when shopping around. |
| How long does it take? |
| Allow about two months, from your first enquiry, to switch to a new lender and complete the deal. Some deals go through in one month. |
| Try your existing lender |
| Having shopped around and done your sums to find the best deal, you can always go back to your existing lender and see if they are willing to match it. If they are prepared to play ball, it could save you a lot of hassle, and a fair proportion of the fees. |
| Seek advice |
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Given the array choices available, you may find it advisable to consult a financial adviser or a mortgage broker to find the solution that best suits you. This will entail a fee, but if advisers are doing their job properly, the savings that you make by using their services should justify the fee. In any case, do your own homework so you can be sure that their advice really is up to scratch. For general advice, see the website of the Financial Services Authority: www.fsa.gov.uk/consumer Council of Mortgage Lenders: www.cml.org.uk Independent Financial Advisers: www.unbiased.co.uk |
| Comments, copyright and linking |
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