Remortgaging is still a great financial move
With the cheapest mortgage rates having already been pulled as a result of recent Base Rate hikes, you might think there isn't much point in remortgaging anymore.
Research from financial data site Moneyfacts highlighted how the average two- and five-year fixed-rate deals have increased by 0.21% and 0.17% respectively in recent months.
It means the average two-year rate has hit the highest level in almost seven years, while five-year deals are nearing a three-year high.
And while there's no doubt remortgaging now will be costlier than it would just three months ago, it's absolutely still worth doing.
Huge savings still possible
For starters, analysts are convinced the Base Rate will rise dramatically over the next year, with some expecting it to hit 1.5% by 2023 - an increase of 1% on the current rate.
With such economic uncertainty ahead, it's extremely difficult to predict what will happen next, but it seems almost certain mortgage rates will keep on rising.
“Financial markets are sending the clearest message in 20 years that mortgage rates are going to rise,” said Tom Bill, head of UK residential research at Knight Frank.
That likely means the longer you wait to remortgage, the higher your monthly repayments will be.
The second observation to make is that, even at the newly increased rates, the best buy mortgage deals are still much cheaper than sitting on your lender's Standard Variable Rate (SVR).
According to Moneyfacts, the average SVR currently stands at 4.61%. As a point of comparison, you can still snap up two-year fixed deals with rates as low as 1.84%, while five-year fixes start at 1.91%.
So if you are on your lender's SVR, or you are about to be dumped onto it as your current deal is set to expire, then remortgaging could still save you a fortune.
As a clear illustration of this, conveyancing firm LMS’ latest Monthly Remortgage Snapshot highlighted how the average monthly mortgage repayment for those who remortgaged in January plummeted by £231.
The final point to make is that remortgaging is typically far simpler than getting a mortgage to purchase a new home, so it'll be less hassle than you'd think.
Convinced? Here are some simple steps to guide you through the process.
How to remortgage: start by getting organised
The first step to remortgaging should be getting to grips with your current situation.
It’s a good idea to get together any paperwork on your existing deal so that you can make a note of the interest rate you currently pay as well as the SVR your lender has in place for when your offer comes to an end.
You’ll also need to find out what you have left to pay on your loan. This information can be found on your annual mortgage statement or by contacting your mortgage provider.
As well as this information you should check what charges apply for leaving your deal.
Your current deal might come with Early Repayment Charges (ERCs). ERCs tend to apply up until your fixed or variable deal ends, but these can carry on after this period with some mortgages so double-check.
They usually apply to your whole mortgage debt so can cost thousands of pounds.
You should also find out the exit fee your provider will charge you to leave your current deal.
This can be between £50 and £200 and will be applied on top of any ERCs, but can only be charged according to what was stated in your original mortgage contract.
It’s also worth mentioning the stricter mortgage lending rules, which mean you’ll need to provide evidence you can afford your new mortgage, not just now but in the future when rates rise.
Lenders will look at your income and want detail of your outgoings. So check your spending habits won’t let you down before you come to apply. Using an overdraft or taking out a payday loan won’t look good.
You should try to reduce your outgoings and boost your disposable income at least three months before you plan to apply for the new deal.
Take a look at what’s on offer
Once you know a bit more about where you stand you should shop around for a remortgage deal to see what’s on offer.
You’ll need to have an idea of the type of mortgage you want to go for (interest-only or repayment, fixed or variable, flexible or offset) as well as your loan-to-value or LTV, which represents what you are borrowing as a percentage of the value of your property.
You can calculate your current LTV by dividing your outstanding mortgage debt by your property’s current value (check Zoopla or Rightmove for an indication if you don’t have a recent valuation from a lender or estate agent) and multiplying the result by 100.
For example a £150,000 mortgage debt on a property valued at £200,000 the current LTV is 75% (£150,000 / £200,000 x 100).
Be aware that your LTV band may have changed since you first got your deal. It may have improved as a result of your regular payments and/or the property increasing in value.
Or it may have got worse as a result of a fall in the value of your property.
If you have less than 5% of equity (which means you need to borrow more than 95% of what your property is worth) or you are in negative equity (where your loan exceeds the value of your property) you will find it difficult to remortgage.
Armed with your LTV range you can browse for an appropriate remortgage deal (remember these deals are different to deals for new purchases).
To compare deals you can check out lenders directly, see if your current account provider can offer a special deal (existing customer deals tend to be more competitive) and use a comparison site.
Or you may appreciate the help of a mortgage broker in your search to find the best deal for your situation and fight your corner with the lenders.
However, bear in mind that some banks and building societies don’t work with brokers so make sure you check out these deals too.
If you’re confident you can do it solo, pick out a deal and continue with these steps!
Challenge your existing lender
Once you’ve picked out a deal you can challenge your existing lender to beat it.
Like energy and telecoms providers, mortgage lenders don’t want to lose customers, so yours might make you an offer you can’t refuse.
Lenders have specific mortgages, called product transfers. designed to keep borrowers that are thinking of leaving.
These just change the terms of your current deal, which is usually quicker and cheaper especially if you haven't asked to increase your mortgage debt.
It will be simpler and cheaper to stick with your current lender than go elsewhere as you can avoid certain fees and charges. But don’t let this sway your judgement.
Work out the cost of switching and the savings
Before you make the decision to remortgage it’s important that you work out the costs of leaving your existing deal and moving to a new one as well as finding out how much you will actually save (especially if this is your objective for the remortgage).
Use the information you gathered in step one to work out the cost of leaving your deal and whether you’ll have to pay an exit fee and any ERC on the date you do it (you’ll save thousands by switching after ERCs no longer apply).
Then you’ve also got to consider the fees associated with the switch and the new mortgage.
You might need to pay legal fees to solicitors as well as charges associated with setting up a new mortgage like valuation fees, arrangement fees, booking fees and in some cases a higher lending charge and transfer fee.
Rather than raid your savings to pay for these upfront you may be able to find fee-free deals or deals that have some of these costs (like legal and valuation fees) included.
Alternatively, you could add the fees to your new mortgage, but this can be expensive as you’ll be paying interest on the extra debt for the duration of your deal.
Once you’ve decided which deal you think you want to switch to, you should also do a savings comparison to ensure you’ve picked the right one.
There are a host of mortgage calculators available online.
You can input the cost of your current deal (or its future SVR) and compare it against the cost of a new deal to see what sort of savings you will get over the introductory period and over the term of the deal.
Once you’ve taken a closer look at your situation, the deals available to you and the costs and savings you should be able to decide if remortgaging will benefit you.
Apply for your new deal
Before applying you should check you and the property are eligible for the deal.
You should also double check your credit record is in good shape as this is something lenders will check as part of their assessment.
It’s also worth getting together the additional paperwork you’ll need like your last three month’s bank statements, last three month’s payslips (or two or three years’ worth of accounts if you are self-employed) and proof of bonus/commission.
You should also get a copy of your latest P60 or SA302 tax return (mainly for self-employed).
Ideally, you should apply before your existing deal ends to ensure you don’t spend an extended amount of time on your lender’s SVR. You’ll also want to time it right so you don’t end up paying early repayment charges for leaving your current deal too early.
You should aim to apply three to six months before your current deal ends as lenders will make an offer that remains valid for at least this long.
When you are ready to switch you can continue with the process which can take around four to eight weeks.
If your application is rejected take a look at Why mortgage lenders turn you down to see what may have impacted the decision.
Even better, read it before you apply to make sure there’s nothing that will hinder your application!