Defaqto

What is remortgaging?

Remortgaging is when you change your mortgage to a different lender. However, the term is often incorrectly used to include occasions when you do the following:

Take a further advance

This is where you stay with the same lender and increase the size of your existing mortgage, against growth in the equity of your home. (You can also do this at the same time as remortgaging to another lender, providing you meet its criteria).

If you are staying with the same lender, the extra borrowing usually constitutes a separate loan which runs alongside your existing mortgage. In this case, it doesn’t matter if you are tied into a special rate deal with your existing mortgage as you are not redeeming it – you are simply adding to it.

In most cases, you will be able to have a ‘further advance’ on any mortgage product within a lender’s existing range, although some will apply their more expensive Standard Variable Rate (SVR) to the extra borrowing.

Borrowers should be wary of the effect of having two separate loans secured against one property. This often results in two sets of tie-ins that mature at different times and you will be tied to the lender for the duration of the longest one.

Switch to a different product  with existing lender

This is where you keep your mortgage with the same lender, but switch to a different mortgage product which requires you to sign a ‘deed of variation.’

You will only be able to carry out a product transfer without penalty, if your current deal – a two-year fix for example – has come to an end. Then, in some cases, such as with the Woolwich, you will be able to switch to any of its current mortgage offers.

Other lenders however, such as Halifax, hold back some of the cheapest deals exclusively for new borrowers which forces clients wanting a more competitive deal to remortgage

Why has  remortgaging become so popular?

Shopping around regularly for a new mortgage deal every few years is a relatively recent phenomenon. In the 1970s and 1980s, mortgages were rationed and a deposit was be essential. Borrowers tended to stick with the same mortgage for 25 years and most mortgages were on a standard variable rate. 

Nowadays, there is far greater choice and availability. According to the Council of Mortgage Lenders (CML), 37 per cent of all lending by value is currently for remortgages and around 75 per cent of all UK borrowers are on fixed rate deals.

What are the benefits of remortgaging?

There are several reasons why people choose to switch current lender.

Complacency is expensive

At the end of any deal, whether fixed, capped, discounted or tracker, your lender will automatically move you to its Standard Variable Rate (SVR), which is typically around 1.5-2  per cent over Bank of England base rate.

So if you don’t negotiate a new mortgage deal, you will automatically revert to your lender’s SVR which could be up to 2.5 per cent more than the best deals on offer elsewhere.

Variations on a theme

Even if you are satisfied with your current mortgage rate, the mortgage market in the last five to 10 years has widenend significantly and there are dozens of type of mortgage and hundreds of variations of these to choose from.

Flexible mortgages

Some lenders now offer fully flexible mortgages. Although there is no industry definition of ‘flexible,’ a mortgage branded as such is generally expected to incorporate the following features.

These are the facility to:

• make overpayments
• make underpayments – usually to the level to which you have overpaid
• take payment holidays
• borrow back from your mortgage without ‘remortgaging’
• pay interest on a daily, rather than annual, basis – the former is more cost effective as your debt is reduced more quickly, and
• pay off the mortgage at any time without paying a redemption penalty.                                                         

However, many standard mortgages now allow you to overpay by a certain amount each year, penalty-free.

All mortgages at Yorkshire Building Society, for example, allow borrowers to repay an extra 10 per cent of the outstanding loan each year, free of charge, while Nationwide allows borrowers to make overpayments of up to £500 each month on its fixed and tracker mortgages penalty-free.

Offset mortgages

These allow you to offset the interest on your savings (provided these are held with the same provider) against your mortgage interest.

For example, if you have savings of £10,000 and a mortgage debt of £200,000, you will only pay interest on the remaining balance of £190,000.

Standard Life Bank, for example, allows borrowers to add an offset facility onto the vast majority of its standard residential mortgage deals for a one-off fee of £99.

But mortgage offsetting is only suitable for people with substantial savings and/or fluctuating earnings (perhaps from large bonuses, commissions, or freelance earnings paid at irregular intervals). This makes offsets attractive to people like barristers, stockbrokers and city traders.

Ray Boulger, senior technical manager at John Charcol says:  “As the best offset mortgage rates have moved closer to mainstream rates, offset mortgages have become suitable for more people, but generally speaking, they are best suited to people with volatile cashflows.”

How do I go about remortgaging?

Once you have decided that you want a remortgage, you need to source the cheapest and most flexible deal for your circumstances. There are a number of ways to go about this.

Negotiating with your current lender

Although lender loyalty is less prevalent nowadays, you may want to check out what your current lender will offer you before you decide to remortgage.

It could be that, if you have been a reliable customer, have a relatively large loan with a small loan to value, your current lender can pull some strings to retain your valuable business. However, flexibility varies from lender to lender and in most cases, you should not assume that you will be successful.

But it’s worth a go as some lenders, such as Abbey, take a very flexible view on remortgagers and will go considerable lengths to retain your custom.

Using a financial adviser

In November 2004, mortgages – and at the same time,  mortgage advisers – came under the jurisdiction of the Financial Services Authority (FSA). A month later, the FSA split financial advisers into three categories:

• tied advisers, who give advice only on mortgage products of the lender they work for;
• multi-tied advisers who give advice on mortgage products offered by a limited range of lenders; and
• independent financial advisers (IFAs) who must give totally impartial advice and make recommendations from the entire market. According to the IFA directory, IFA Promotions, 30 per cent of all remortgagers use the IFA route.
• Researching online.

The difference between today and the last time you may have looked for a mortgage is that you can now do all the legwork online. There are several broker sites that will scour the mortgage market on your behalf once you have input your borrowing requirements and income.

Check out Defaqto’s best buy tables elsewhere in this section, but for full advice, you need to consult an IFA.

What does it cost to remortgage?

Some lenders offer ‘fee-free’ remortgaging, which means they will pay for the valuation and legal fees on your behalf.

Other lenders may restrict fee-free remortgaging to a limited selection of products. But with lenders that are not willing to subsidise any of your remortgage fees, you can expect to pay the following:

Valuation fee: The new lender will want to see that that the security for its money (namely your house) is adequate and will want a valuation of your property, costing around £250 +VAT.

Legal fees: Conveyancing (the legal work of transferring the property into your name), will cost £300- £1,000 +VAT depending on complexity of the transaction.

An arrangement fee: This is usually payable to the new lender when taking a fixed rate mortgage although it could apply to other types of mortgage. A typical arrangement fee is around £500 but where it is a percentage of the value of the loan, it could be several thousand pounds.                      

Bear in mind that ‘free legals’ are often on condition that you use the lender’s own solicitors. If you want to employ your own solicitor, the lender is likely to cap the amount it is willing to pay, typically at £250.

Even when valuation and legal fees are marketed as ‘free,’ they are usually payable by you on completion of the mortgage which means you will still have to pay the money upfront and reclaim the money from the lender afterwards.

In some cases, where the rate is very low, it is increasingly common for the fee to be a percentage of the loan.

A  Northern Rock two-year fixed rate mortgage with a 3.99 per cent pay rate once charged a staggering 2.5 per cent of the loan. So if you transferred a mortgage of £200,000, it would have cost you £5,000 for the privilege.

It is best to pay the arrangement fee upfront. If you add it to the loan, you will be paying interest on the money for the term of your mortgage.

Other costs

The costs don’t stop there. Regardless of whether your remortgage is marketed as ‘free’ or not, the following less obvious costs could be payable.

Broker fees. Since financial advisers were regulated in 2004, there are three ways in which you could be charged:

• Fee-only: This is where you pay an hourly rate to the adviser. A retainer may also be agreed whereby you pay a certain amount each year and then pay a reduced rate on hours of advice given.
• Commission: The adviser works on a commission basis, whereby he or she receives commission from the lender which is typically a percentage of the loan. If you pay nothing direct to the adviser, you may well be paying indirectly via a higher arrangement fee or interest rate.
• Fees offset: The adviser offsets commission or the ‘procuration’ fees he receives from the lender, against his fee for advice.
• All advisers – whether independent, tied or multi-tied – are legally obliged to disclose upfront how they charge. However, only an IFA is legally required to scour the entire market. To find an IFA local to your area, visit the IFA Promotions website at http://www.unbiased.co.uk/
• A deeds release fee. Your existing lender may charge you an exit fee to release its legal charge over your property, costing  around £50-£300.
• Search fees. Your new lender may also want to check for new developments in your area that may have an impact on the value of your property. These searches can cost £150 - £200.

Potential pitfalls of remortgaging

There are a number of pitfalls associated with remortgaging which could either wipe out the expected savings or make your mortgage arrangements less flexible in the future.

Paying to escape your current lender

If you have a fixed or discounted deal with your current lender, remortgaging to a cheaper rate could prove to be a false economy.

This is because lenders will charge a redemption penalty during the special offer period, usually as percentage of the loan, decreasing as each year of the fix elapses.

Tie-in periods usually last for the same time the special deal – a five-year fix will normally come with a five-year tie-in for example. Sometimes redemption penalties are ‘tiered’ which means that the percentage charged decreases as each year elapses.

It is important to do your sums carefully and take all costs into account before deciding to remortgage as, after penalties and fees, you could find yourself in the same, or a worse, position than before.

How long do you really get on your new mortgage deal?

When switching to a new deal that has a certain shelf life – a two-year tracker for example – the two years may not necessarily start from the day you complete on your remortgage.

Deals often carry an expiry date based on their launch date, not on the date your mortgage actually starts. So you might find a ‘two year’ deal only lasts one year and nine months, if you actually start repayments three months after launch date.

The temptation to increase your loan when remortgaging.

Many homeowners, when switching lenders, decide to take a ‘further advance’ against their property at the same time, using the extra funds to pay off more expensive unsecured debt elsewhere.                               

This usually only makes financial sense if house prices continue to rise. Although house prices doubled or trebled in value in some areas of the UK during 1996-2006 house price boom, there is no guarantee that this will continue in the future.