Changing your mortgage Remortgage options
Remortgaging has become an integral part of being a UK homeowner. But how
does the right borrower end up with the right deal? Laura Brady breaks down the
mortgage maze…
Along with switching off the lights and ensuring you have a full load of
washing, changing your mortgage is now part and parcel of keeping down household
costs. Last year, 41 per cent of all lending was to remortgagers
looking for a better deal, according to recent figures from the Council of
Mortgage Lenders (CML).
And decreasing your monthly mortgage payments has become especially important in
the face of rising house prices. The February house price index from Rightmove
showed that the price of an average UK home has now broken through the £200,000
barrier. “In turn, this means people are taking sizable
mortgages so being on a
cheaper deal has become really important. It can now result in hundreds of
pounds in savings each month,” says Louise Cuming, head of mortgages at price
comparison website, Moneysupermarket.com.
But with 5,000 mortgage deals available across an estimated 150 lenders, where
does the borrower start? Quite simply by understanding the finite number of
categories each mortgage falls into – and working out which one best suits your
circumstances.
Fixed rate deals
This is when the rate of interest you pay on your mortgage is frozen for a
certain period – usually between two and five years. “Fixed rate deals are
particularly attractive at the moment because they are cheap relative to other
deals,” explains James Cotton, mortgage manager at broker, London & Country.
“The general rule of thumb is that you pay a premium on a fix in return for the
security of payments it offers. But at the moment there is no premium of this
kind.”
Five-year fixed rates have been flying off the shelves at Derbyshire Building
Society. The lender is mid-way through its remortgaging campaign, which urges
homeowners to “take their heads out of the sand and see how much they can save,”
explains marketing manager Tony Barnes. “Most borrowers have opted for our
five-year fix priced at 4.86 per cent and increased the loan size at the same
time. Customer feedback has pointed to home improvements as the reason for this
– and in many cases it means a better home for the same monthly repayment.”
There is also an unusual bout of 10-year fixed rates appearing on the market. As
lenders have tried to undercut each other on these deals, the 10-year fixes have
even become as cheap as their two, three, and five-year counterparts. The
Woolwich, for example currently offers the leading 10-year fix, priced at just
4.67 per cent. Norwich & Peterborough Building Society follows close behind with
a deal at 4.68 per cent and Halifax has reduced its 10-year fixed deal to 4.99
per cent.
But all fixed rate deals come with an equivalent tie-in during which time it
will cost the borrower deal to redeem the mortgage. Cuming says that largely,
homeowners are unwilling to commit to a long-term fix. “People don’t know what’s
going to happen in the next 10 years,” she says. “It could be anything from
winning the lottery to getting a divorce but either way being tied into a
mortgage deal could be a problem.”
Remortgagers looking to increase their loan size – especially if it means a
higher monthly repayment – could be most suited to the security a fixed rate
loan offers.
The Portman Building Society is offering a two-year fixed rate deal priced at
4.39 per cent. It comes with a two-year tie-in and an arrangement fee of £649.
Remortgagers do not have to pay for legal and valuation fees. The deal is
available up to a 75 per cent Loan to Value and only through an intermediary.
Northern Rock is offering a two-year fix at just 3.99 per cent. However,
borrowers will pay an arrangement fee of 1.5 per cent of the loan.
Remortgagers will need a 15 per cent deposit and a minimum loan of £100,000 to
qualify. The mortgage allows unlimited overpayments, charge-free. The deal is
available through all channels.
Base rate tracker mortgages
But, according to Cuming, there has been a movement away from fixed rates
recently while homeowners anticipate further cuts in the Bank of England base
rate (currently at 4.5 per cent). This is why tracker mortgages – which are
pegged above the base rate by a certain margin – have been more popular.
Although a lot of remortgagers opt for a two or three-year tracker, the products
are also available for the life of the loan. “Lifetime trackers tend to attract
a certain age group – those people who have endowments maturing or want to start
clearing as much of their mortgage as they can,” says Cuming. This is because
lifetime trackers come with the flexibility that allows borrowers to make
unlimited overpayments at no cost. Borrowers can pour into the debt anything
from an annual bonus to an inheritance – or overpay each month what they have
saved by remortgaging. This will mean lower interest repayments and a shorter
loan term. And, as lifetime trackers typically do not come with tie-ins, if the
base rate goes up, the borrower is free to remortgage again at no
financial penalty.
Hinkley & Rugby Building Society is offering a lifetime tracker a 0.35 per cent
above base rate (giving a current payrate of 4.85 per cent). Remortgagers will
not have to pay legal and valuation fees and will not be subjected to tie- ins.
A £499 arrangement fee is payable and a minimum deposit of 15 per cent is
required for loans up to £150,000. The product is available direct to the
borrower.
Nationwide Building Society has just launched a lifetime tracker priced at 0.39
per cent above base (currently payable at 4.89 per cent). Borrowers will need a
10 per cent deposit and to pay a £199 reservation fee as well as a £99
contribution to legal and valuation fees.
Discount mortgages
Initially discount mortgages are often cheaper for the borrower. They offer an
upfront discount from the lender’s standard variable rate – the central rate of
interest at which each lender will lend to borrowers who are not on a specific
deal. Again, the deals are usually taken on a two or three-year basis and come
with tie-ins for the same duration. “Discount mortgages are always available but
not talked about much,” says Cotton. “This is because, where are lenders are
falling over themselves to undercut competitors on fixed rate deals, discounts
will just sit there as they rise and fall with the lender’s SVR.”
Discount mortgages place the borrower more at the mercy of the lender than their
base rate tracker cousins. This is because discounts track the lender’s SVR, not
the base rate. And if the base rate falls the lender is under no obligation to
follow with its SVR. “In fact lots of lenders use downwards base rate movements
to actually improve their profit margins,” says Cotton.
However, remortgagers looking for an initial low monthly payment could do well
to check out what discounts are available. It is important to bear in mind that
the products are variable and your repayments could go up as well as down.
The Portman is offering a competitive discount mortgage at 2.26 per cent off its
SVR (6.5 per cent) for two years, giving a current payrate of 4.24 per cent. The
deal comes with a £499 acceptance fee is available up to 95 per cent Loan to
Value. A higher lending charge applies to those borrowers requiring a 90 per
cent LTV or over. The mortgage is available through intermediaries only.
Capped rate mortgages
The less common capped rate mortgage offers a good compromise between fixed and
variable deals. A cap is simply a promise from the lender that your rate will
not climb above a given point. As long as you can afford this ceiling rate, you
can’t go wrong. Unsurprisingly, initial rates on these deals are priced at the
cap but if they are tied to the base rate, the hope is that this will go down.
Leeds Building Society is offering an attractive capped rate mortgage that also
tracks base rate by plus 0.25 per cent until 30 November 2008. The deal is
currently payable at 4.75 per cent, which is also the rate of the cap. If base
rate goes down, so will your rate. But if it goes up, you will still pay no more
than 4.75 per cent. There is a minimum loan amount of £100,000 and a £695
completion fee is payable. Borrowers will need a minimum deposit of 25 per cent.
Paying the SVR
If you are looking for a straightforward variable rate mortgage that you don’t
have to think about until retirement, a lifetime tracker is the best choice. But
the bread and butter standard variable rate mortgage is still an option – in
fact an estimated 30 per cent of borrowers have got one.
But paying any the SVR even for a couple of months can mean wasting a hundreds
of pounds in interest repayments. According to Moneyfacts, the average SVR
currently stands at 6.45 per cent for existing borrowers. On a 25year repayment
mortgage of £150,000 this would cost £1,008 a month opposed to the £816 if you
were paying Portman’s two-year fix priced at 4.3 per cent.
If this is still the way you are heading, at the very least look going with a
lender that has a low SVR. HSBC and Egg are two of the best contenders with SVRs
of 5.25 per 5.49 per cent respectively.
Case study
Electrician, John Simms is currently in the process of switching his mortgage
from Halifax to Nationwide Building Society. “I had two separate fixed rate
mortgages from Halifax payable at 5.79 per cent and 5.55 per cent,” he says. “I
combined them and took a two-year fix with Nationwide – which is payable at just
4.4 per cent.” Even though Mr Simms had to pay a £3,000 early repayment charge
to Halifax, it still made economic sense to switch.
“If I transferred just the existing £112,000 mortgage I would save £200 a month
straight away,” says Mr Simms, who has a four-bed terrace house in Silver Hill,
East Sussex. “But as I have been offered £136,000 from Nationwide against the
property value of £170,000, I might increase the loan slightly to cover the
costs of recent home improvements. After all the monthly repayments would be the
same.”
Mr Simms paid £99 in remortgage costs and was very happy with the service he
received from Nationwide.
This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd
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