Recent changes in mortgage rates mean that millions of borrowers are paying more than they need on their home loan and would be better off switching to another deal. But for many, the mortgage market is just a maze of confusion, so how do you find your way through and work out what you should do?

We take a look at what remortgaging is and what factors you need to consider when comparing mortgage products.

What is remortgaging?

Quite simply, remortgaging is the term given to the process of switching onto a new mortgage deal – either with the same or a different lender.

The most common time to remortgage is when the fixed or introductory tracker or discounted rate on your mortgage ends. At this point you will be moved onto a long term variable rate – usually your lender’s standard variable rate (SVR) – and historically this has tended to be higher than the rates available on new mortgage deals, which is why so many people switch at this point.

However, the number of people remortgaging has slumped over the last couple of years. Figures from the British Banker’s Association show that 20,629 loans were approved for remortgaging in December 2009, compared with 67,882 in January 2008 – that’s a decline of 70%.

Why have fewer people been remortgaging?

There are two main reasons for this. Firstly, it’s been harder to get a mortgage because of the credit crunch: rates on new deals have been more expensive; borrowers have been required to put down larger deposits due to the shortage of funds; and banks and building societies have been choosier about who they will lend to. As a result, many people found they simply couldn’t remortgage when their introductory rate ended.

Over the past 12 months or so, the other main reason for the steep decline in remortgaging is the fact that many borrowers have actually been better off staying put because their lender’s SVR was lower than the rates available on new mortgage products. However, even though the Bank of England base rate has been at 0.50% since last March, that tide is now turning because SVRs are on the up and new mortgage rates have become more competitive as the funding crisis eases.

What is happening to SVRs?

A number of providers have announced increases to their SVRs recently. Norwich & Peterborough Building Society has just hiked its by half a percentage point from 4.85% to 5.35%, while Skipton Building Society’s SVR is going up from 3.50% to 4.95% on 1 March.

SVRs are not directly linked to base rate, which is why lenders can change them even though the Bank of England hasn’t altered the country’s official rate of interest for nearly a year.

There is a massive variation between the SVRs charged by different lenders. Lloyds TSB and Cheltenham & Gloucester (both part of the same group) have an SVR of just 2.50% – Lloyds was the only one of the country’s 20 largest lenders to pass on the reductions in base rate we saw between October 2008 and March 2009 to its SVR. Chesham Building Society, by contrast, has the highest SVR at 6.45%. The average SVR is currently 4.69%.

But with the leading tracker rate mortgages at less than 3.00% and the best fixed rate deals below 4.00%, remortgaging is becoming an attractive option once again.

Hannah-Mercedes Skenfield, mortgage manager at moneysupermarket.com, said: “If you’re sat on your lender’s SVR don’t be complacent – for many people now is the time to switch, particularly if you want to lock into a fixed rate as the rates on this type of mortgage aren’t likely to get much lower.”

What do you need to consider when remortgaging?

Fixed vs variable:

You tend to pay a higher rate (initially) if you opt to fix your mortgage rate as opposed to going for a tracker, but this is not surprising given the security you have of knowing exactly what your monthly repayments will be for the next few years. For some people, this premium will always be worth paying, particularly if you need to budget carefully.

However, others will be happy to take a bit more risk and go for the variable rate option in order to take advantage of lower monthly payments in the short term at least.

The cheapest tracker is currently 2.39% compared with 3.29% for the lowest two-year fix, so base rate would have to rise by one percentage point before your monthly repayments on the tracker would be higher than those on the fix.

The problem with base rate moves is that no one knows when they’ll happen and there’s little point in trying to second guess them as you probably won’t get it right. The most important thing is to go with what you’re comfortable with: if you are worried that your mortgage payments may rise and become unaffordable, go for the security of a fix.

Arrangement fee:

The mortgage with the lowest rate may not actually be the cheapest deal. It’s vital to factor in the impact of arrangement fees as well, because you may find that it is actually cheaper to pay a slightly higher rate of interest if the set-up costs are lower – this will depend on how much you need to borrow. If you are borrowing a large amount, it can be worth paying a larger arrangement fee in return for a low interest rate but on smaller loans it may be better to opt for a higher rate in return for a lower set-up fee.

The key is to work out how much you would pay in total – so monthly payments and fees – over the term of your mortgage. For example, Santander has a two-year tracker at 2.49% with a £995, while Yorkshire Building Society has a two year tracker at 2.64% and a £495 arrangement fee. Despite the higher rate, the Yorkshire deal is actually cheaper over the two-year terms on loans below £280,000 because of the lower fee.

Other fees:

Don’t forget that even if you are remortgaging there will be legal and valuation costs to factor in as well. These will be lower than if you were buying a house but your new lender will require a valuation survey and a solicitor will need to do the paperwork. Some mortgage products include a free valuation and legal work for those remortgaging so it may work out cheaper in the long-run to opt for one of these products than to go for a lower-rate deal that doesn’t come with any freebies.

If you are unsure about how to work out what the best deal is, a mortgage broker will be able to help.

Deposit:

The amount of equity you have in your home can really make a difference to the competitiveness of the mortgages you’ll qualify for. In order to be get the best rates available at the moment you really need a deposit of at least 25% – in some cases more.

Early repayment charge:

How long do you want to be tied in to your current mortgage deal for? This is an important thing to consider when you’re comparing mortgages because most products will levy an early repayment charge (Erc) during the introductory period. So with a two-year fix or tracker for example, you will probably be charged a penalty to get out of the deal during the first two years.

With shorter term deals, being tied in in this way isn’t usually too much of a problem. Where it becomes more of a potential problem is with longer term deals such as 10-year fixes, because a lot can change during that time and if circumstances do alter it can literally cost you thousands of pounds to get out of your mortgage early.

Not all products have an Erc, however. Most lifetime trackers for example, are completely penalty-free, making them a highly flexible option.

Exit fee:

When you come to remortgage, you will be charged an exit fee by your current lender. This is to cover the administration costs of closing your existing mortgage account. Costs vary depending on the lender: the most you’ll be charged is around £295, but in many cases it could be less.

The fee will be stated on your original mortgage offer and a clampdown by the Financial Services Authority a few years ago, means that lenders can’t alter the exit fee during the term of your mortgage.

What deals are available?

If you are happy to go for a variable rate deal, First Direct has the leading lifetime tracker at 2.39%. There is a £999 arrangement fee but those remortgaging receive free legal work. Another big plus about this deal is that there is no Erc, so if rising mortgage payments do become an issue for you, or your circumstances change, you can remortgage at any time without penalty. The downside is it’s only available for loans up to 65% of the property’s value, so you’ll need a deposit of at least 35% to be eligible.

For those with less equity in their home, Yorkshire Building Society’s two-year tracker at 2.69% is available for mortgages up to 75%. As mentioned above, the arrangement fee on this deal is well below average at £495. It is worth noting, however, that unlike First Direct’s lifetime trackers you will be charged an Erc if you want to redeem the loan in the first two years.

If security is important and you would prefer to fix your mortgage payments, First Direct is offering a two-year deal at 3.29% with a fee of £998. Again, as with its lifetime tracker, legal work is free if you’re remortgaging. There is an Erc which applies throughout the fixed term. More people will qualify for this product than the two trackers mentioned above, as the minimum deposit is 25%.

Another attractive deal is a three-year fix from Post Office. The rate is higher at 4.99%, but this product is available for loans up to 80%. The arrangement fee is also lower than average at £599, although you will be charged an Erc if you need to get out of the deal during the three-year fixed term.

Some people will prefer a longer-term fix, despite the fact they’ll be tied in. HSBC has a five-year deal at 4.73% but you’ll need a sizeable deposit – it is only available for loans up to 60% of the property’s value and there is a £999.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

Similar Posts:

Share