If there’s one financial decision that sends shivers down my spine – it’s when a homeowner allows their fixed-rate mortgage to end and doesn’t do anything about it.
Why is this such a fear-inducing thing, you ask? Well, the vast majority of mortgage loans are sold as a ‘fixed-rate’ product which gives you a preferential interest rate that is locked in for a certain amount of time – normally two, three or five years (although some go up to ten!). After this time your lender will automatically switch you to the so-called SVR (Standard Variable Rate). This rate tracks above the Bank of England interest rate and can work out to be substantially more expensive and end up costing you tens of thousands more in interest repayments over the course of your loan.
There is a Solution to Your Mortgage Worries
The good news is that at the end of your fixed-rate period with your lender you are free to look for other lenders to remortgage with. It’s worth noting that if you pay-off or try to remortgage before the fixed period is up, you may incur fees.
Lenders are savvy creatures and know that inertia is the key to them making lots of money. By you not making a decision to remortgage they earn a lot more from you. There is increasing pressure, however, for responsible lenders to make sure they aren’t profiteering from people who don’t get round to remortgaging; this means that your current lender may well get in touch with you directly to let you know that your fixed period is coming to an end and encourage you to change products, and sign up to another fixed-rate loan with them.
You don’t, however, have to stay with the same company. If your financial situation allows for it, good advice from a broker could get you an amazing new deal. You could even borrow enough to do that renovation work you’ve been desperate to do since buying your home.
What You Can Do When you Remortgage
There are a few reasons why you might choose to change the loan you have. These are the most common:
· Reduce your monthly repayments – if you are eligible for a new loan, you could reduce your monthly payments with a lower-interest fixed-rate mortgage. If you’ve built up equity in your home, you may be eligible for better rates as you’ll have a more preferable loan-to-value (LTV) with that higher capital acting as a bigger deposit.
· Shorten the time it takes to repay – you can also use more equity and better interest rates to negotiate a shorter repayment period. If you can afford to pay more monthly, then you could significantly shorten the time it takes to pay back your loan.
· Help to Buy equity loan repayment - More and more houses and flats are acquired thanks to government support from the Help to Buy Equity scheme. Sooner or later, you’ll likely want to increase the stake you own in your home. Remortgaging can help you borrow more and make this a reality.
· Additional funds for renovation – Remortgaging can help you release additional funds to renovate. Banks also allow you to remortgage a home you currently own to build or buy another property.
How to Remortgage
As complex as it all might seem to be, there are really only three main ways to remortgage in the UK:
· Product transfer - this is the option that will appeal to those who are satisfied with both their current lender and the rates offered by their bank. It simply involves signing a new loan agreement by selecting a new product (Fix, Tracker, etc.). The good news with this method is that you won’t need to present earnings documents or recalculate the value of your home. Some banks require confirmation of creditworthiness, but it depends on the internal policy of the institution.
· Apply for a loan with a new lender - another method is to move to a bank with more attractive rates. This procedure is a bit more difficult - it resembles the first mortgage application and requires similar preparation. The big advantage, however, is the fact that solicitor’s costs will be much less than in the case of the original mortgage. Some banks even offer to cover this cost.
· Apply for a cash loan - this option is chosen by people who want to increase the price of their home. It guarantees additional cash, but you must not forget that the credit conditions change significantly. First of all, the repayment period or the amount of the loan instalment increases, which means that it will take you longer to be free from mortgage payments.
Beware of Fees
As I mentioned before, you’ll be charged if you try and remortgage before your fixed period ends. There are also some other costs to consider when you remortgage as well. Arrangement fees can be added to the mortgage itself and be paid off as part of the total loan but can be in excess of £1,000 in some cases. You’ll also need to set aside money to pay for legal advice if you choose to move provider.
As always, before making a decision, it is worth consulting an experienced broker who will thoroughly explain all your options and help you make the right choice for you. Make sure you start this process early though – normally you should be considering your remortgaging choices around three months before the end of your current fixed term to give you enough time to make the right decision
You can find out more about getting the right mortgage advice here [LINK].
Comments