Why Remortgage?
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Article by Hilary Osborn,
Editor, What Mortgage? Magazine.
They say a change is as good as a rest. This is certainly the case for
some borrowers, who will find switching to a new mortgage deal can knock
thousands of pounds in interest payments over the life of their loan.
For anyone who currently
pays a lender's standard variable rate (SVR), remortgaging could be a way to
save hundreds of pounds a year.
Remortgaging means replacing an existing loan with a new one from a
different lender - although it is not uncommon to hear people say they have
remortgaged when they have simply taken a new deal from their existing
lender.
This is often a good option, as it cuts out the need for a new valuation and
searches, and as a result reduces the cost of getting a new mortgage.
Why remortgage?
As a potential remortgagee, you need to establish whether you have anything
to gain by moving your mortgage.
There are a number of things that can be achieved by a
remortgage - you
could cut your rate, release equity that has built up in your property, or
move from a variable-rate deal to a fixed rate making it easier to manage
your budget.
The most popular reason for remortgaging is to reduce monthly repayments. If
this is your motivation you should look at the rate you currently pay and
then see if there are any better rates on the market.
If there is a better deal, ask your lender if it can offer you anything
similar. It should be willing to move you on to a lower rate, unless your
current mortgage is subject to early redemption charges.
Early Redemption
Charges
Early redemption charges are levied if you repay your loan in a certain
period.
They are often found on deals with a special offer rate upfront - for
example a fixed or discounted rate - and are designed to help the lender
recoup the costs of setting up the deal. (Or, to be more cynical, these
charges allow the lender to recoup in one hit all the profit they expected
from the full duration of the loan.)
Usually, the charge is a percentage of the loan you are repaying, or a
number of months' interest. Most charges are payable only during the special
offer period, but in some cases they are levied beyond that - these are
called overhanging redemption charges.
To pay or not to pay?
In some cases it may be worth paying this fee - for example, if you have
several years left on a very high fixed rate after the sweet deal has ended.
Often, though, it’s worth sitting tight until you can walk away from the
deal without paying hundreds of pounds for the privilege.
Ask your lender for a redemption statement outlining the outstanding
mortgage balance and how much you need to pay in charges.
On top of redemption fees, most lenders charge a sealing fee and/or a fee
for releasing the deeds, which can add up to around another £100.
What will you save?
Once you have an idea of the cost of getting out of your current deal, you
can work out what savings there are to be made.
Using an online mortgage wizard or mortgage calculator, work out what the
monthly repayments will be on a new deal, and compare these with your
current payments.
Factor in the costs that may come with a new deal - any arrangement fee,
valuation fee and conveyancing costs - and you can see whether there are
genuine savings to be made.
In some cases there will be very little in the way of upfront costs. Many
lenders offer remortgage packages, including a free valuation and free legal
work and waive the arrangement fee on new loans.
This can be handy if you have a small mortgage; but on a larger loan it may
be better to look for the lowest rate rather than the best incentives.
Remortgaging to release equity
All of the above also applies if you're remortgaging to release equity from
your property.
This is an option of your property has increased in value, or you’ve paid
off a lot of your mortgage, and is simply a matter of borrowing more than
your current mortgage debt.
To do this, you need to earn enough to raise the new loan (see guide to
borrowing). Remember, if you’re arranging a loan over a shorter period than
your original mortgage you'll need to earn more to raise the same mortgage.
Taking the first steps
In most cases, arranging a remortgage will be fairly straightforward and
will take much the same form as arranging your first home loan.
Your new lender will ask for paperwork to support your application,
including proof of your income and your outgoings. They will carry out a
valuation - although on a remortgage the surveyor may just drive past the
property - and ask for information about your home.
Some will want you to instruct - and pay for - a local authority search;
others will accept title insurance - a policy covering them against anything
that would have been uncovered in the search.
Your solicitor will organise the searches, and handle the switch over from
your current lender to your new one.
Costs and time
The total legal costs should be much lower than when you bought the
property, as there are no contracts to prepare and there is no stamp duty to
pay.
However, you should still budget to spend £300-£500, unless your new deal
comes with free legals.
It shouldn't take long to replace your current deal with a new mortgage, but
if you’re coming to the end of a fixed-rate or discount period you, can
start shopping around some months in advance.
Most mortgage offers last for around three months, and if you plan ahead you
can have a new deal sorted out to start the day the special-offer rate ends.
This means you can hop from one fixed rate to another and avoid paying over
the odds for your loan.
If you would
like to discuss your options given your personal circumstances
we recommend you contact us to discuss your
requirements.
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