For the majority of people, the most expensive outlay they will have is their mortgage. When you buy any other kind of product, you would probably do adequate research to check whether you are getting the best value for your money. When you first take out a mortgage, you will hopefully do the same, checking all of the current deals to find the one that works out most financially beneficial for you.
However, that deal might be the best one initially but after a few years, that might not be the case. With fixed rate mortgage deals, you will have a set interest rate for a set number of years and then switch to a standard variable rate. Once this happens, you could be paying much more than you would if you shopped around and found a better mortgage deal.
How often should you review your mortgage?
It is a good idea to stay aware of the current mortgage market at all times, as changes such as interest rates or other types of changes could save you money. If you are not up to date with the current mortgage deals, you should be reviewing your mortgage a minimum of:
- When your mortgage deal comes to the end
- When there is a change in interest rates
- Once a year (if you are not tied to a deal with a large repayment penalty)
- When your LTV drops into a better range
Staying up to date
Staying up to date with the latest mortgage rates does not require you to look up the different providers’ rates every day, you can simply sign up for a monthly newsletter that presents you with the information that you need. Another good way to remember when you need to review your mortgage is by setting up a reminder, for example, a few months before your deal ends, or on the same day each year.
How much can you save by remortgaging?
The amount you can save depends on a number of different factors, such as how much your outstanding loan is and what you are paying on your current mortgage deal.
To give you an example, showing the difference between switching to one of the best deal on the market or letting your mortgage run onto the SVR (Standard Variable Rate):
On a mortgage amount of £200,000 over a 22 year term:
1.5% interest would be a monthly payment of £890
4% interest would be a monthly payment of £1,140
The cost saving here would be £250 per month, or £3,000 per year.
When you stack those savings up over a longer period, you would be saving huge sums of money by switching to a better mortgage deal.
How does your current mortgage deal compare to best deals?
It is not just when you come out of your fixed term period that you could find a better deal. If interest rates were higher when you took out your current mortgage deal, or your credit history meant that you had to take a mortgage out on a higher interest rate, you could also be able to save money by switching.
The other factor to remember is that your LTV (Loan to Value) ratio determines how good a deal you are able to get. So, as you start paying off more of your mortgage loan, at some point your LTV will cross the next threshold, for example, go from 70% to 60%, which will open up the opportunity to get a better deal. If your property value increases, this can also put you into the next LTV threshold. You can check on sites like Zoopla to keep a regular idea of how much your property is valued at.
Keeping an eye on what the interest rates are likely to do is also very important. Currently the Bank of England base rate is at 0.75% and the uncertainty surrounding the impact of Brexit on economic growth makes it difficult to forecast whether the base rate will change. When an interest rate increase is forecasted, it makes good sense for homeowners to get a mortgage deal that has a fixed rate, to ensure the increased interest rates do not affect how much they pay for their mortgage.
Remortgage costs to be aware of
Whilst remortgaging will often save you money, there are circumstances where it may end up costing you more to take out a new mortgage deal. The situations to be aware of are:
- Where you are subject to paying a high early repayment charge. This will usually be whilst you are in the initial fixed period, as most mortgages will not have a repayment charge after that period.
- Charges related to the remortgage such as legal fees and property valuation can be expensive, so check if these are payable and whether the costs are more than you would save by switching.
- Arrangement fees are charged by many lenders when they set up a new mortgage. This fee is typically around £1000 to £2000, although you can get some deals that don’t charge an arrangement fee but they will often have higher interest rates.
- You may need to pay an exit fee when you leave your current mortgage lender.
As well as there being additional charges to consider, there may be incentives that mortgage lenders offer as part of your deal such as £200 cashback or a free valuation. So, you will need to take all of these costs and potential savings into account when you do your calculations.
Preparing for a remortgage
When you apply for a new mortgage, you might find that lenders have become stricter regarding the evidence they want to collect as proof of income. In April 2014, new regulations came into place for acquiring evidence of affordability, so you are likely to be asked for payslips and bank statements to prove your income.
For self-employed people, tax returns and business account statements completed by an accountant may be requested. The lender will also analyse your outgoings to determine whether they think you can afford your new mortgage. Even if you have been paying off your current mortgage, the in-depth review that they now perform could result in them declining your mortgage application.
Before you apply for a new mortgage deal, you should try to get your credit score as high as possible. Therefore, paying off outstanding credit, making sure you always pay bills on time, not applying for any new credit and making sure you are on the electoral roll will help to boost your score.
Your LTV ratio is also very important in getting access to the best mortgage deals, so if you are really close to going over the next threshold, it might be worth waiting a bit longer to remortgage. Alternatively, if you have some extra money to put down against the mortgage, this can get you access to the better deals through a better LTV ratio.
If your personal circumstances have changed, for example, you have separated from your partner who was on the mortgage, you may find that taking out the mortgage on your own is more difficult due to the lower household income.
Other issues that will affect your ability to get a remortgage include poor credit history and if you have taken out large loans, such as a car that increases your outgoings and may mean that you don’t fit the affordability criteria. You could also face issues if your property value has decreased, so all of this should be taken into account before you decide whether to switch mortgages.
Finding a new mortgage deal
The best place to start is to get an approximate value for your property using Zoopla or similar and then using a mortgage deal comparison calculator. You will be able to see a list of the different lenders and the deals you are likely to be eligible for, based on the information you provide. You will need to find out from your current lender exactly how much will be outstanding if you repay the mortgage, including any exit or early repayment fees.
There are lots of different mortgage types available, so you should fully research any that you are thinking about taking out before you commit to any deal. It can be tempting to bring your monthly payments down by taking your mortgage over a longer term but the overall costs will end up being much greater. If you can afford to pay more of your mortgage off each month, you will pay significantly less interest over the term of the mortgage.
Remortgaging can save you a significant amount of money, so it is worthwhile keeping up to date with your current mortgage situation and regularly checking whether it is a good time to switch. If you would like any advice on whether it is the right time to remortgage, Boon Brokers would be happy to help you.