Remortgaging

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 within your lender’s existing range, although some lenders will apply their 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.

Switching to a different product with your 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’.

Generally you will only be able to carry out a mortgage switch without penalty, if your current deal has come to an end. Then, with some lenders, you will be able to switch to any of their current mortgage offers, depending upon the amount of equity you have in your property.

Some lenders, however, hold back some of their cheapest deals exclusively for new borrowers, which forces clients wanting a more competitive deal to remortgage with another lender.

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 essential. Borrowers tended to stick with the same mortgage for 25 years and most mortgages were on a SVR.

With the bank base rate remaining at a historically low figure of 0.5%, and many bank and building societies offering low SVRs to existing customers, the number of people remortgaging in the last year has dramatically reduced. Instead when their fixed or tracker deal has expired they are moving onto the lenders’ SVR, which in some cases can be as low as 2.5%.

It is likely that the bank base rate, and therefore the SVRs, offered by banks and building societies will increase this year, and this is could to lead to an increase in the number of remortgages as people seek to ‘lock into’ a fixed rate deal.

What are the benefits of remortgaging?

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

At the end of any deal, whether fixed, capped, discounted or tracker, your lender will automatically move you to its SVR, which may be more expensive than the rate you have been on. The onus is on you to see whether you can move to a more competitive rate with your existing lender, or whether you need to remortgage with another lender to get a better deal.

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

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

Negotiate 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.

If you have been a reliable customer and have a relatively large loan with a small loan-to-value, your current lender will be keen to retain your valuable business. However, such flexibility varies from lender to lender and in most cases, you should not assume you will be successful. But it’s worth a try as some lenders take a very flexible view on remortgages and will go to considerable lengths to retain your custom.

Using a financial adviser

In November 2004, mortgages came under the regulation of the Financial Services Authority (FSA) and now financial advisers are split into three categories:

• Tied advisers: give advice only on mortgage products of the lender they work for;
• Multi-tied advisers: give advice on mortgages offered by a limited range of lenders;
• Independent financial advisers (IFAs): give totally impartial advice and make recommendations from the entire market.

Remember that you can now also do most of the legwork online. The Defaqto mortgage comparison tool will scan the mortgage market on your behalf once you have input your borrowing requirements and income. But if you want independent advice, you need to consult an IFA.

What does it cost?

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 mortgages. Otherwise, expect to pay the following:

Valuation fee: The new lender will want to see 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 to transfer the property into your name), will cost £300-£1,000 +VAT depending on the 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 £900, 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 the condition that you use a firm of solicitors on the lenders’ panel. If you want to employ your own solicitor, the lender is likely to cap the amount to, typically, £250.

Even when valuation and legal fees are marketed as ‘free’, they are usually payable on completion of the mortgage, which means you will 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 arrangement fee to be a percentage of the loan. It is best to pay this fee upfront as 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 and the following less obvious costs may also be payable:

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 receives commission from the lender, which is typically a percentage of the loan. If you pay nothing directly 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.

A deeds release fee: Your existing lender may charge 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.

All advisers are legally obliged to disclose upfront how they charge.

Potential pitfalls

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 because of redemption penalties which apply during a special offer period – usually a percentage of the loan which decreases over time.

Tie-in periods usually last for the same term as the special deal. For example, a five-year fix will normally come with a five-year tie-in and will often be ‘tiered’, meaning 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 it is not worth the time and hassle for little, or no, saving.

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

When switching to a new deal that has a limited offer period – 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 and you might find a ‘two year’ deal only actually lasts one year and nine months.

Increasing your loan when remortgaging

When switching lenders, some homeowners decide to take a ‘further advance’ against their property at the same time and use 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 1996-2007 house price boom, there is no guarantee that this will continue in the future. Indeed in 2008 house prices decreased by up to 20% with only a slight recovery being seen in 2009.