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Remortgages and remortgaging

Remortgaging New Year, New Start

If you have overdone it during the festive season, don’t despair. Your mortgage could provide the answers you are looking for, says Laura Brady

Hangovers from the New Year feel 100 times worse when your finances are in a state of similar disrepair. But rather than crawling back under the duvet, use the start of 2006 to really get on top of your financial demons. And these days, the best place to start is with your mortgage.

How can my mortgage ease my financial problems?

A mortgage used to be a fixed point within a homeowner’s finances. Considered ‘untouchable’ it was there to be paid every month for 25 years at a changing rate of interest stated by the lender. Now this central role that a mortgage plays in a homeowner’s finances can be turned around and used to their advantage.

To make a short term saving for example, you can swap your mortgage for one of over 4,000 currently on the market that – for a limited period of time – will offer a rock bottom interest rate.

In the more medium term, you can consolidate any debt racked up over Christmas by taking a further advance from your lender. This means borrowing against newly acquired equity in your home at cheap mortgage rates to pay off more expensive debts like credit cards, store cards and even overdrafts.

In the longer term, you can take advantage of the different kinds of ‘flexible’ mortgages available that effectively hand the reigns of the loan to the borrower. A flexible mortgage allows a homeowner to pay as much as they can off their mortgage each month without being penalised. The effect of overpayments is to considerably reduce the duration of the loan and therefore the interest payable on it.


SHORT TERM SOLUTIONS
 
Switching mortgage lenders and/or deals to save on interest payable

When it comes to saving money in 2006, the first port of call is to look at what rate of interest you are paying on your current mortgage. This can vary considerably according to both your lender and mortgage deal. However, it could be the case that you are not on a deal at all and are forking out for the lender’s Standard Variable Rate (SVR). This is a benchmark interest rate a lender charges all borrowers who are not on a specific mortgage. The current average SVR among UK lenders is 6.5 per cent – two per cent higher than some of the most competitively priced deals – but no borrower need pay it.

“On average, more than 25 per cent of homeowners in the UK at any one time are paying their lender’s SVR,” says Louise Cuming, head of mortgages at price comparison website, Moneysupermarket.com. “If you are paying this rate of 6.5 per cent and have an average size mortgage of around £150,000, you could save £3,000 a year straight away just by switching to a more competitive product.” Cuming adds that borrowers often overestimate the inconvenience of switching mortgages. “Nowadays there are often no valuation or legal fees to pay as they are covered by the lender,” she says. “And solicitors are so used to carrying out remortgages, it can be done and dusted in between four and six weeks.”

The type of mortgage deal you opt for will primarily hinge on your Loan to Value (LTV) and whether you want the security of payments that a fixed rate offers. “But if you can afford to take a view on interest rates over the next year, it is likely that they will come down,” says Ray Boulger, senior technical director at broker, John Charcol. “We are anticipating a quarter per cent cut in February or March, another one in the summer and perhaps one more later on in the year.” Therefore, although taking a deal linked to the base rate may not be the cheapest option now, it could pay off later on.

The deals to look at: If you are simply in search of the lowest rate of interest and need security of payments, try Portman Building Society’s fixed rate mortgage priced at just 4.3 per cent until January 31st 2008. It comes with a £499 acceptance fee and tie-ins last only for the duration of the deal. With a repayment mortgage of £150,000, this product would cost £816.81 a month compared to the £1,012.81 you would pay on an average SVR of 6.5 per cent.

Nationwide Building Society is offering a two-year tracker mortgage priced at base rate plus 0.04 per cent – currently payable at 4.54 per cent. Remortgagers will not have to pay legal and valuation fees although they will be charged a £494 arrangement fee. With a repayment mortgage of £150,000, this product would cost you £837.16 a month compared to the £1,012.81 you would pay on an average SVR of 6.5 per cent.

Switching to an interest-only mortgage

You may however already have market-leading mortgage but are still finding it hard to make ends meet in the New Year. If this is the case the best way forward is to approach your lender immediately. Since the regulation of mortgages by the Financial Services Authority (FSA), in November 2004, all cases of financial hardship must be treated ‘sympathetically’. “This means that you will be presented with more options than ever to tide you over any short term difficulties in meeting your mortgage repayments,” says Cuming. These include taking a payment holiday, extending the term of your loan or even temporarily switching to an interest-only deal.

How much less will I pay with an interest-only mortgage? If you had a standard repayment mortgage (when both the interest and capital is repaid every month) and are paying a leading rate of 4.3 per cent, your monthly repayment would amount to £816.81 a month. On an interest-only basis this would cost only £537.50 a month. But remember – unlike the effect of switching your mortgage to get a better rate – you are not ‘saving’ the difference of £279.31 each month. This is a sum will have to be repaid at a later date, either by overpaying when you can afford to, or extending the term of your mortgage.

MEDIUM TERM SOLUTIONS
Taking a further advance

Even the most prudent among us tend to spend a little over budget at Christmas. But if your financial surplus is sitting on credit cards accruing interest at rates of 18 per cent or worse on store cards that can charge up to 30 per cent, it could be time to consolidate. Many people choose to do this by taking a personal loan with which to pay off their more expensive debt. Currently 31 personal loans on the market offer rates of seven per cent APR (Annual Percentage Rate) or less. But don’t assume this so-called ‘headline’ rate will apply to you, warns Stuart Glendinning, director of personal loans at Moneysupermarket.com: “According to our figures, 93 per cent of loan providers offer ‘typical’ loan rates calculated on a ‘price for risk’ basis. Consumers would be wise to check they will benefit from a good rate before switching debts over.”

However, if you borrow against the recently acquired equity in your home by taking a further advance on your mortgage, it is likely you will get a rate lower than even the cheapest personal loan. “You can take a further advance without remortgaging or even if you are tied into a particular deal,” explains Duncan Pownall, mortgage manager at Bradford & Bingley. “However, although you will not pay any penalties to take a further advance, the additional funds are not likely to be lent at the same rate as the rest of your mortgage. Instead, some lenders have a product range for further advances or will charge the additional funds at the rate of its SVR.” Borrowers may also have to pay for a revaluation fee and administrational fees, which together could total around £400.

It is also important to bear in mind that, as the debt will be repaid over the longer term of your mortgage, your lender should not be a first port of call to rectify Christmas debt problems. Pownall says: “A further advance should onlybe considered if you are at really at your limit with unsecured borrowing and even then it is worth negotiating with your credit card provider first.”

If it does make financial sense to borrow against your home, borrowers should check if their lender will allow them to repay the extra borrowed over a shorter period of time, resuming payments on the original mortgage balance for the remainder of the term. “Not every lender offers this service but some do – such as Standard Life Bank,” says Cuming. “This approach will prevent you from paying interest for 20 years on a simple over-spend one Christmas.”

LONG TERM SOLUTIONS

Getting flexible

However, if you had a flexible mortgage, you could organise three years of overpayments yourself as and when it suited you. A flexible mortgage allows borrowers to choose how much to pay each month. If you have overpaid enough, you will be eligible for a payment holiday or to borrow back the overpaid funds without the hassle and cost of remortgaging. A genuine flexible mortgage will also charge interest on a daily basis – which is good for your pocket – and will not come with any tie-ins which in turn means you can redeem the mortgage at any point without paying a redemption penalty.

Offset mortgages

Take flexible mortgages one stage further and you will arrive at an offset mortgage. These do ‘all of the above’ but in addition, allow the borrower to offset their savings against debt. This means that if you have savings amounting to £20,000 and an outstanding mortgage of £150,000, you will only pay interest on the difference – in this case £130,000. The fact that all of your finances are held with the mortgage lender – albeit in separate pots – means you will not earn interest on your savings. But even this is beneficial, especially for higher rate taxpayers, as it means avoiding the tax payable on it.

“Interest rates on offsets used to be priced at a premium but they are now comparable to some standard mortgages,” says Boulger. He adds however, that offsets still only make true financial sense if borrowers use all the facilities they provide. This means thinking carefully about the type of offset you would be most likely to use. For example, some offset providers will allow a current account to be linked to your mortgage or direct debits to be set up from linked savings accounts. Other just offer a plain savings account with chequebook. “If you are not going to use all the facilities on your offset mortgage, it can make more financial sense to just opt for a fully flexible deal,” says Boulger. “Northern Rock has a good range of fully flexible mortgages.”

Deals to look at: Clydesdale Bank is offering a lifetime tracker offset mortgage exclusively through broker, John Charcol. It is priced at base rate plus 0.39 per cent for the life of the loan and is currently payable at 4.89 per cent. Remortgagers do not pay legal or valuation fees although they will be charged a £449 arrangement fee and a £75 booking fee. There are no tie-ins or redemption penalties. The minimum loan size for remortgagers is £150,000.

Current Account mortgages

A current account mortgage, offered by the likes of the One account, NatWest and Yorkshire Bank, work in exactly the same way as an offset but, rather than keeping your finances in separate pots, lumps them all in together, creating one big negative balance. Interest rates on these products are still considerably higher compared to regular mortgages but it’s important to bear in mind that all debt is being paid at the same lower mortgage rate.

Deals to look at: Current account mortgage, the One account offers variable interest rates – the cost of which will depend on your Loan to Value. Loans of 50 per cent of the property valuation and under will be charged at 5.6 per cent. This is priced on a tiered scale up to 99 per cent LTV at which you will be charged 6.45 per cent. Remortgagers will need to pay for legal and valuation costs, which are added to the account, but no other fees are charged. A One account mortgage does not come with any tie-ins or redemption penalties.

Reviewing mortgage-related insurances

Once you have faced up to your mortgage, you may as well review your mortgage-related insurances at the same time. “Especially when it comes to life insurance, there is no real ‘value for money’ to be sought after,” says Cuming. “In short, it pays out the sum assured if you die and it doesn’t if you don’t, so there’s no point paying over the odds – especially as premiums have dropped in recent years.” Switching providers is easy as the insurance becomes invalid when payments cease. However, it is imperative that you do not leave any windows during which time you are not covered.

Providers to look at: According to Richard Mason, sales director of insuresupermarket.com, Legal & General and Standard Life are two of the most competitive life insurance providers on the market today. “But this is not just in terms of price,” he says. “They are also both strong insurers with good credit ratings, which is an equally important consideration.”

<Case study>

Rob and Jane Lipscombe both 35, from West Byfleet in Surrey, switched from a standard mortgage at Cheltenham & Gloucester (C&G) to the One account back in 2001 in a bid to make long-term savings. “My husband Rob owns a building firm and often had considerable sums of money sitting in a regular business account which he intended to buy land with. We realised that we could put this money to better use by putting it into the One account where it could reduce the interest payable on our mortgage,” says Jane. The Lipscombe’s only needed to take out an £89,000 mortgage against their property that – due to building work and extensions carried out by Rob himself – was valued at £225,000. “I was also earning a considerable salary then as an accountant so we managed to get ahead of our payment schedule,” says Jane.

This came in handy when the Lipscombes had twin girls – Emily and Abigail – three years ago. “We needed to move house for more room and took a £150,000 mortgage against our current four-bed home valued at £400,000,” says Jane. “At the same time I gave up full-time work so for the past few years we have been making lower repayments on our mortgage.” However, Jane estimates that – helped by a small inheritance – they are still further along with their mortgage than if they had stayed with a regular product – despite the fact the rate of interest payable (5.6 per cent) is not competitive compared to the wider mortgage market.



This article has appeared in Mortgage Magazine which is available in all good newsagents. Copyright MSM International Ltd

 

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