According to a survey carried out by Ipsos Mori for Panorama, 31% of people who rent or have a mortgage find that payments take up more than a third of their total household income. Even if your mortgage payments are below this level, if they are a significant part of your budget then getting the best possible deal could be a significant boost to the family finance and ultimately to your personal wealth.
Like other businesses, mortgage lenders need to be on the lookout for new customers. To attract them, lenders may offer very attractive rates for a limited period. These are often called introductory rates. In the UK these generally last about two to five years. After the introductory period has ended, the mortgage will continue on the lender’s standard variable rate (SVR). At this point, borrowers have essentially three options: stay on the SVR, remortgage with their existing lender or remortgage with a new lender.
Staying on the Standard Variable Rate
Although there is the potential to make healthy savings by remortgaging, it’s worth remembering that there are also costs involved. As you are essentially taking out a new mortgage, you will be looking at paying the same sort of fees as you did when you first bought your house. Specifically your house will need to be properly revalued and there will be legal paperwork to be processed. It is also entirely possible that your current lender will charge an exit fee (to close off your old mortgage) and there may also be an early repayment charge. This is basically a fee to compensate the lender for your decision to exit the mortgage early. Some mortgage deals may offer to pay the upfront costs of any or all of these, but this may result in a higher rate. Staying on the SVR makes sense if the cost of setting up a new mortgage outweighs the savings, for example if your mortgage is due to end in a few years anyway.
Remortgaging with your existing lender
In April 2014 new rules were introduced in an effort to ensure that people only took out mortgages they could afford to repay. In principle these rules apply to anyone taking out a new mortgage – including those remortgaging. In practice lenders are permitted a degree of flexibility when dealing with existing customers looking to remortgage. In short, lenders are permitted to issue new mortgages to existing customers who technically wouldn’t be accepted under the new rules, provided that the customers are simply changing to a better deal. If an existing customer wants to make any other changes, such as increasing the size of the mortgage, then they will be treated in the same way as a new customer.
Remortgaging with a new lender
While the new mortgage rules may mean that some people struggle to find a new and better deal, other people are in a much stronger position when they come to remortgage. Those who have been paying off their mortgage over the last two to five years may have built up equity in their home and may have benefited from prices rises as well. This means that when they come to remortgage, their new mortgage may be a smaller percentage of the value of their home. This is called a smaller loan to value (LTV) and is basically the same as being able to put down a larger deposit. Borrowers may therefore be eligible for better deals than they were the first time around. At the very least, investing some time looking at what’s available can help when negotiating with an existing lender.
Understanding the pros and cons of remortgaging
If thinking about remortgaging the basic, golden, rule is to add up all the costs and look at the savings on offer. Then see which is the higher number. Those who would like some help with this process can get professional financial advice from a qualified financial adviser who will be happy to help you get your financial house in good order.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE. SECURING SHORT TERM DEBTS AGAINST YOUR HOME COULD INCREASE THE TERM OVER WHICH THEY ARE PAID AND THEREFORE INCREASE THE OVERALL AMOUNT PAYABLE. YOU MAY HAVE TO PAY AN EARLY REPAYMENT CHARGE TO YOUR EXISTING LENDER IF YOU REMORTGAGE.