With interest rates at the time of writing being incredibly low, property buyers often feel they can find a great property and take a low-interest mortgage for the life of their property. The problem, this is often not the case, your personal or financial circumstances can change, and you could need to change your mortgage. For the majority of us, the time we think about remortgaging is when you go to renew your mortgage, and your lender has significantly raised the interest rates. When this happens, you start to think of yourself a better deal and looking elsewhere for a remortgage.
A remortgage is where you either replace your existing mortgage for a new loan of the same size, or you try to increase the size of your loan for either an existing or new property. Around a third of all home loans made in the UK are remortgages. Most importantly, make sure you take advice from a qualified financial adviser who will be able to advise you on the best course of action.
As an extra protection, if your remortgage turns out to be unsuitable, you can complain to the Financial Ombudsman Service (FOS), however, if you’ve chosen go down the self-execution route and turns out you’ve made a mistake, there is very little you can do about it.
Check The Costs
The number one rule of remortgaging is to check the costs. Over the years, I’ve seen many people switch mortgages only find their current mortgage included a range of expenses from early repayment fees to legal fees. On a £300,000 mortgage, a £1500 arrangement fee negates 0.25% decrease in the interest rate for a two year fixed mortgage. Below are the four types of charges that you need to look out for when remortgaging your property;
- Early Repayment Fees – If you try remortgage before your current mortgage has expired, you’ll be charged with an early repayment fee or exit fee. This will vary depending on your lender but can be as much as 5% of your mortgage.
- Arrangement Fees – Most new mortgages will include some form of arrangement which will often be waived, however could be as much as £2,000.
- Legal Fees – While you probably will not need a solicitor to get involved for anything other than remortgaging with a new lender, its something you need to watch out for as the costs can be huge.
- Valuation Fees – In order to remortgage your house, you’ll need a valuation to confirm the value. The cost varies, but from £200 to £300 is realistic. Anything above this probably requires you to shop around for a better deal.
When Remortgaging is Worth It?
Remortgaging is a great way to reduce your monthly outgoings if done the right way and under the right conditions. It’s usually not worth looking around for a new lender if you owe less than £50,000 on your mortgage. You also need to look at your personal financial situation. In 2014 the government introduced new laws in which you are obliged to show lenders how and where you earn your money. All well and good until your circumstances change and you start looking for a new lender. If you don’t fit their criteria, they won’t give you a loan.
On the same token, your credit rating is very important. A bad rating caused by no more than a missed credit card payment could mean that the lender doesn’t give you the loan. Lenders are bound by law not to give people mortgages who can’t afford them and so will rarely take on a client on who they think presents even the smallest of risks. If you are unsure about your credit rating, check your credit file. You can view it online for free at such websites as Experian. Below are five situations when remortgaging can and will save you hundreds of pounds over the course of your mortgage.
Fixed-rate mortgages that usually last for two to ten years, often start with a special rate, before increasing later in the contract. As an example, Natwest’s fixed-rate, 2-year mortgage currently begins at 1.21% for two years. Once this expires, it reverts to 3.59%.
If you’ve taken out this type of mortgage repayment plan and the two years have expired, it makes sense to change your mortgage as your payments will have substantially increased. On your typical £200,000 mortgage with a 25-year repayment plan, a 1.21% rate means payments of £776.59, however if interest rates increase to 3.59%, your payment would increase to over £1,050.
For the last ten years, interest rates have been relatively steady. The range was from a maximum of 0.75 in 2016 to a low of 0.25 in 2016, but this wasn’t always the case. In 1979, interest rates were a massive 17%, and from 2007 base interest rates fell from 6% to 1.5% in only 18 months.
If you had taken out a £200,000 mortgage in 2007 at 7.50% mortgage rate (base rate was at 6%), and interest rates had fallen to 2% (1.5% base rate), you’d be crazy if you didn’t try and switch your mortgage to a cheaper rate. On £200,000 in 2007, you’d be paying £1,477 a month for your typical 25-year plan, but on 2% you’d now be paying just £847.71. This is a massive saving of over £630 per month.
Before you go out and change your mortgage, remember that it doesn’t always work this way. While there is little doubt that finding a better rate could potentially save you a lot of money, your current lender will charge you for leaving the agreement early. This can be as much as 5% of the outstanding amount. This, together with arrangement fees and valuation fees and arrangement fees for your new mortgage, means that you need to do the maths before you commit to a new mortgage.
Interest Rates Going Up
We saw above that it worth remortgaging if interest rates have substantially decreased, but the same applies if you think they’re going to increase. Imagine if the reverse happened and interest rates went from 1.5% base rate to 6%.
One way to stop your interest payments increasing substantially is to fix your mortgage for a period of time. Typically you have three choices, 2-year fixed, 5-year fixed or 10-year fixed. At the time of writing, you can get a 10-year fixed-rate mortgage at 2.34%. For your average £200,000 mortgage, this would mean you would pay 121 monthly payments of £933.58 and 179 monthly payments of £1036.31 over 25 years.
On a personal note, I thought interest rates were going up a couple of years ago and fixed my mortgage for ten years. Was a good deal? Probably not as interest rates has come down over the last couple of years. That said, it means I can sleep at night knowing that my repayments are not going to change for the foreseeable future.
Your Home’s Value Has Gone Up… Alot
In the UK, mortgages are decided by your Loan to Value (LTV), which is effectively a ratio between the size of mortgage a lender is prepared to offer you in relation to the value of the property. Its expressed as a percentage, so with typical LTV’s ranging from 50-95%.
When you’re looking for a mortgage, your LTV affects the amount you can borrow, and the rate you can borrow at. The lower the LTV, the better the mortgage rates available to you. As an example, if you’re buying a £500,000 house in the UK today and have a deposit of 200K, your LTV is 60% (Loan “divided by” the Property Value “X” 100). As a result, you’ll have a wide range of choice with rates around 2%, but if your LTV was at 90 or 95%, you’ll be considered much more of a risk for your lender as such your rates will be higher at about 3%.
The key point here, like most people, my wife and I did not start off with a 200K deposit. We made this money over the course of a few years through saving and property value increases. A 20% increase in property prices takes my 500K house to a 600K valuation. It also means my 300K loan, no longer has a 60% LTV, but now a 50% LTV (Loan “divided by” the Property Value “X” 100) and a result can command an even cheaper loan repayment interest rate.
Changing the terms of your mortgage is always a difficult proposition. Often it much easier to simply remortgage your property rather than trying to change. Below are four mortgage changes that are often not possible, and would be easier to simply remortgage.
- Early Pay-Off – If you’re suddenly in the money and you want to start paying more off your mortgage you may find yourself blocked from doing so by your lender. Even if they allow you to pay off a bit more than usual it may be only slightly above your previous payment. Again your wisest option would to remortgage, taking in consideration any exit charges for leaving your current mortgage early.
- Interest Only To Repayment – In theory your current lender should be happy to change your loan over to a repayment mortgage and even part of it to a capital payment. However, you will find most lenders won’t change your loan from capital repayment to interest.
- Increase the Size Of Your Mortgage – You could consider remortgaging if your current lender has either turned you down your request for extra money or are offering you poor rates on a new loan. Your new lender will question you thoroughly, and ask for proof on what you want to spend the money on, for example repairs, but is likely to give it you if it’s for home improvements or paying off debts.
- More Flexibility – Sometimes having a mortgage can stop you from living the life simply because, no matter what, you have to continue to make the payments. That often means you can’t go back to education or take an extended vacation. You are, or feel you are, stuck. This is an unnecessary trap to fall into and there are plenty of mortgages out there which offer you all sorts of flexibility. You may have to pay higher interest rates, but as they say you can’t put a price on freedom. Just make sure when you are buying these extra options that they are not duping you into paying for anything else.
You may think you’ve found the perfect mortgage, and perhaps you have, but there is always a chance it won’t be your last. You house could drop in value or you could inherit lots of money. There are plenty of reasons why people don’t settle.