The Best Strategy For Remortgaging
Should you bother switching your homeloan? Or is apathy the best strategy right now?
Remortgage levels (which have propped up the mortgage market for some time) have dropped considerably in the last few months.
Every year millions of existing borrowers come to the end of a deal, like a two-year fixed rate or a three-year tracker. And this constant churn of borrowers has been the mortgage industry's bread and butter for the last few years.
But now people are coming up for renewal on their mortgage and deciding not to bother switching, and while this situation continues there is little chance of lending levels increasing.
Annoyingly for lenders, remortgages are generally low risk and relatively low loan-to-value -- exactly the sort of business they want.
Why is remortgaging less appealing?
The bottom line is that remortgaging doesn't save many borrowers money at the moment. Why go through a load of hassle switching your mortgage if you are going to save nothing, or the savings will be negligible?
The reason remortgaging is less attractive is that SVRs have come down further in price than new deals.
This is important because when you come to the end of a fixed rate for example you automatically revert to your lender's SVR. In the past this was an expensive option and there were far better deals to be found by remortgaging.
Now lenders have reduced their SVR dramatically following the last four Base Rate cuts. Below are examples of current SVRs.
Lenders have faced great political pressure to pass on cuts to their SVRs and the average is currently 4.99%, according to Moneyfacts, which is historically very low indeed.
On the other hand lenders have widened their profit margins on the new deals they are offering. Each time rates are reduced, some deals are repriced downwards but not always by the full amount of the rate cut.
The upshot is that when you come to remortgage your lender's SVR may look more attractive than any of the deals you can switch to. According to our partner, Moneyfacts, the average two-year fixed rate is higher than the average SVR at 5.05%, while the average tracker rate is slightly lower at 4.11%.
Then you have to take into account the costs of switching. Revert onto your lender's SVR and you pay absolutely nothing -- plus you are not tied in with any early repayment charges.
If you remortgage to a fixed or tracker rate you will have to pay your existing lender an exit fee to leave the mortgage, which will typically be about £250. Then you will pay your new lender mortgage arrangement fees, which could cost you anything from around £100 to £2,500, depending on the deal you move to.
The argument to stay put is even more compelling for high loan-to-value (LTV) remortgagors -- those with very little equity in their property.
The less equity you have in your property the higher risk you are deemed to be for lenders -- and they charge you more to offset this risk. So while the average SVR is 4.99% the average two-year fixed rate for somebody with just 10% equity in their home is a massive 6.29%. And there are no two-year tracker rates available at this level.
A fixed rate of 6.29% on a £150,000 mortgage would cost £993 a month. Those lucky enough to be with a lender with a 3.5% SVR would only need to pay £751 a month -- £5,808 less over two years.
Remember an SVR is variable and rates could go up. With a fixed deal your rate is guaranteed.
Low LTV? Worth switching
If you have a lot of equity in your home it could still be worth shopping around for a better deal than your lender's SVR, as the market is much more competitive for those with 25% equity and above.
According to Moneyfacts, two-year fixed rates for those with more than 25% equity are 4.8% and two-year trackers just 4.11% -- beating the average SVR (but of course you still need to look at costs).
The best deals are reserved for those with at least 40% equity in their homes -- fixed rates average 4.37% and two-year trackers a competitive 4.05%.
But these are averages.
What are the current best deals for those looking to remortgage onto a fixed or tracker rate at 60%, 75%, 85% and 90% LTV?
My favourites are below. They are not always the cheapest interest rates (since they often come with extortionate fees). Instead I have looked for good all-rounders -- the cheapest rates with fees under £1,000. Of course it might suit you to take a mortgage with a much larger or smaller fee.
|80%||First Direct||Term Tracker||3.39%||£799|
Use our mortgage calculator to figure out how much these deals would cost you.
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