You could save several hundred pounds a year by switching to a better mortgage. The biggest draw with remortgaging is the possibility of paying less interest, allowing you to pay off your home loan sooner than you would have had you stayed on your original deal. And there lies the very top-most of our tips: every time your deal expires, check whether you could cut your monthly payments if you remortgaged to a new deal.
First, take a look at your current deal
The best time to look around for a new deal is three to six months before your current deal expires.
This is because when your current deal expires, you’ll usually be moved on to your lender’s Standard Variable Rate (SVR). This is typically around 2% higher than the most competitive deals on the market – so it’s wise to line up a new deal to switch to on the day your current deal expires, to avoid being moved on to SVR.
So, before you can decide whether you’re better off remortgaging, you need to know what your lender’s SVR is, as that’s the rate you’re likely to have to pay once your current deal expires. You also need to know how much is outstanding on your mortgage. Call your mortgage company or consult your most recent annual statement to get this information.
It’s also well worth checking whether Early Repayment Charges (ERCs) will apply when you want to switch, or you could face a large penalty fee. Usually, ERCs stop applying when your current fixed, discounted or tracker deal ends, but do double-check because this can vary. If these charges do apply, you may well be better off waiting and remortgaging when these charges no longer apply. As your lender how much they will be.
Lastly, be aware that you may be charged an exit fee when you switch. This fee is on top of any ERCs. But the good news is, the lender cannot increase this fee beyond the original figure laid out in your mortgage contract.
Be sure to take all fees and charges into account when calculating whether you should switch.
Next, check out some of the newest deals
As mentioned previously, if you don’t switch, you’re likely to be automatically moved onto your lender’s Standard Variable Rate, and pay around 2% more in interest than the cheapest deals on the market. This may sound small but it isn’t – on a £100,000 mortgage, it adds up to £2,000 more each year.
Take a look at some of the Best Buys listed on our mortgage comparison tables for a quick look at how much you could save. Keep in mind that the cheapest rates are usually available to people with low 'loan-to-value' ratios (LTV for short). To find out what your LTV is, divide the amount that’s currently outstanding on your mortgage by the estimated value of your home. So if your home is worth £100,000 and you have an outstanding mortgage of £75,000, then your LTV is 75%.
If your LTV is under 60%, you could be eligible for some of the market’s best deals. Even when you factor in an application fee for a new mortgage (which could be £500 for the cheapest deals on the market), plus legal and valuation fees, you will probably find that remortgaging offers you a better deal in the mid-to-long run.
Brass tacks: compare the costs
Before you sign anything, you’ll want to get a handful of quotes from two or three lenders and then compare them to your existing deal. Be sure you are comparing like with like – for example, if you have an interest-only mortgage, be sure to compare it against other interest-only mortgages. And likewise, if your mortgage has 20 years left, compare it against a 20-year deal, not the standard 25-year plan.
Do your sums
Once you have several figures in front of you, tot up the costs that will charged by your current borrower plus those you'll incur for a new mortgage. Assuming it will cost you £300 to leave your current provider and £700 to get on with mortgage B, switching to mortgage B carries a total cost of £1,000. You may find that many of the fees associated with moving mortgages are the same, regardless of the size of the loan. This can be a good thing if you are after a larger loan as it is one area where cost won’t inflate.
Once you have your total switch cost, compare it to your total monthly savings. If it’s going to cost £1,000 to switch but you will save £250 per month, your switch will pay for itself in four months, and is probably very worth it. Given that the cheapest mortgage deals often only last for two or three years, this can be a lot of effort to go through very two or three years.
For this reason, come people opt to go for a five-year deal where they balance slightly smaller savings with a slightly longer breathing period between mortgages. However, this means you have less flexibility, as you are tied into the same deal with the same lender for a longer period.
If you’re planning on moving in the near future, make sure you get a mortgage which is portable. This means you can port your debt between properties and do not have to pay off the mortgage in order to buy a new property.
Just as mobile phone providers, so are mortgage lenders: they do so struggle to say goodbye. Once you know how much you can save by switching to mortgage B, go back to your lender and present your case. They'll still want your business, so much so that they may put a lower rate on the table, or even switch you to one of their cheaper deals. The beauty of this option is that normally a lender will do this without charging you the fees you would have encountered with a new lender.
Of course it’s possible your lender won’t offer you the deal to end all deals. If this happens, no problem – you’ve got mortgage B waiting in the wings.
One final trick…
Would you like to save more money in the long run, to the end of becoming mortgage-free a lot sooner? Here’s our tip: once you find a cheaper mortgage, continue paying the same amount of mortgage each month as you are at the moment. By effectively ‘overpaying’ in this way, you could save several thousand pounds in interest, bringing forward the day that you, and not your lender, are the proud owner of your own home.
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