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Switch and save?
With
interest rates rising, are you worried that you may have missed
the remortgaging boat? Amanda Jarvis explains that it’s not
too late to switch mortgages and save money
Everybody’s
doing it, or so it would seem. Next to property prices, remortgaging
has become one of the most talked about mortgage topics over the
last few years. In fact, the value of remortgaging during 2003 was
50 per cent higher than in 2002, according to the Council of Mortgage
Lenders (CML). This is because the low-interest-rate climate has
encouraged borrowers to switch mortgage lenders either to save money
or to release some equity to fund spending. But as interest rates
start going upwards, is it too late to switch?
Whether to remortgage depends on the mortgage deal you currently
have and what your needs are. If you took your mortgage out a few
years ago and are stuck on your lender’s standard variable
rate (SVR) you will almost certainly be able to save money by switching
to another product. “Now that rates are going up we are going
to see a reaction from the classic apathetic borrower who has been
happy to have an SVR because the mortgage rate has been reducing,”
believes David Hollingworth of mortgage broker London & Country.
“Rates are still lower than they have been, and this should
be the motivation that borrowers need to switch,” he says.
The Consumers’ Association estimates that homeowners waste
£2.2 billion on expensive mortgages. It has launched www.switchwithwhich.co.uk,
a mortgage comparison website that will calculate the cost of remortgaging.
It has worked out that somebody with an £80,000 interest-only
mortgage paying the SVR of 5.7 per cent, could reduce his or her
repayments from £380 a month to £259 by switching to
a fixed rate of 3.88 per cent.
Saving money is not the only reason to switch mortgages, though.
If you have a discount, tracker or capped-rate mortgage and are
concerned that your repayments are likely to go up over the next
couple of years, it might be time to switch to a fixed rate. That
way you will have peace of mind that your repayments will stay the
same for a few years.
You may also want to release some equity from your home and use
it to fund home improvements, school fees, a holiday or a wedding,
for example. If you bought your home a few years ago and it has
increased in value, by switching to a cheaper mortgage you may find
that you can raise quite a lot of money, yet continue to pay the
same each month for your mortgage.
But before you start poring over the best-buy tables, there are
a few things you need to bear in mind. First of all, check to see
if your lender will charge you a redemption penalty if you move
and, if so, how much it is. Penalties are common with fixed, discount,
capped and tracker deals and less common if you have an SVR. Some
lenders charge penalties even when your special-deal period has
come to an end. One way around this is to see if your lender can
move you into a better deal. That way you may not have to pay the
redemption penalty or some of the other costs associated with remortgaging
(see left: “The cost of remortgaging”).
The next thing to do is to calculate how much you could potentially
save by remortgaging, or how much it will cost you to trade in your
discount for a fixed rate. You need to deduct the cost of redemption
penalties, legal costs and mort-gage set-up costs from your total
costs to work out if it’s worth switching. Many websites offer
a cost comparison service. Switch with Which? will help you to work
out if it’s worth switching or not, and how much money you
will save.
“The service is unique because it takes into account all the
costs of switching,” explains Rebecca Fearnley, senior researcher
at the Consumers’ Association. You will need to provide information
such as redemption penalties on your existing mortgage to be able
to make an accurate comparison. It will show you monthly savings
as well as savings over a period of time. “The average time
to keep a mortgage is five years,” says Fearnley, “so
we suggest you look at the savings over that time, but you can choose
whatever time period you want to.”
Choosing the right deal
Knowing which mortgage to go for can be tricky. With interest rates
on the up it can be tempting to lock into a fixed rate, which will
give you the peace of mind that your repayments will stay the same
each month. Unfortunately, there aren’t that many cheap fixed-rate
deals around, as most lenders based their rates on the assumption
that interest rates are going to rise. Most, if not all, of these
mortgages come with redemption penalties, so you will have to stick
with the mortgage, or pay the penalty if you decide to move within
the fixed-rate period.
Once you start looking for mortgages you’ll find that many
products are aimed at the remortgage market only and set-up fees,
valuation fees and, sometimes, legal fees will be waived. Chelsea
Building Society, for example, will not charge an administration
fee, arrangement fees or legal fees if you use a Chelsea BS solicitor.
If you can’t use a Chelsea BS solicitor for any reason, it
will give you a contribution of £200 towards your legal costs.
So how do you decide between a cheap mortgage where you have to
pay fees and a slightly more expensive fee-free deal? “It
comes down to how big your mortgage is,” says Hollingworth.
“The larger the mortgage, the more important a low interest
rate becomes, because we calculate the total cost of borrowing.
With a small mortgage, a fee-paid deal will win every time.”
Making the move
If you’ve chosen a mortgage that includes free legal
services, you will be given the name of the solicitor dealing with
your transaction. If not, you will need to employ your own solicitor
to carry out the remortgage for you.
You will have to fill in an application form with your new lender.
The form will ask you to decide how you would like to repay the
mortgage – repayment or interest only. If you move from one
repayment mortgage to another, it will help keep your mortgage costs
down if you can keep the same overall term. If you have been paying
a 25-year mortgage for the last five years, by switching to another
25-year term you extend your mortgage and have to pay interest on
it for longer. It would be much better for you if you then switched
to a mortgage over 20 years or less.
If you have an interest-only mortgage, you can change over to a
repayment, but you’ll need to decide what to do with the investment
that you’ve been paying into to repay your mortgage. If you
continue with an interest-only mortgage and have borrowed extra
money, make sure that you increase the amount you pay into your
investment each month to cover the extra borrowing.
The new lender will want to value the property to ensure that it’s
worth what you are borrowing. There may be a fee for this, but more
often than not the lender will carry out what is known as a ‘drive-by
valuation’, where the lender looks at the home from the outside.
You won’t have to pay for this.
Your solicitor will obtain a redemption statement from your existing
lender. Once you have this you can tell your new lender exactly
how much you want to borrow. If it is happy with the valuation and
the amount it can loan you, you will get a firm offer, which means
you can go ahead with the remortgage.
There may be some mortgage set-up fees to pay, which can be paid
upfront or added to the mortgage. Bear in mind that any fees you
add to the mortgage will incur interest for the term of the mortgage.
Once your mortgage has been transferred you will get a letter from
your new lender confirming the monthly repayments.
The timing of your remortgage could be crucial, as some lenders
will charge interest on a full month, even if you redeem your mortgage
part-way through that month. “If your lender charges interest
annually and you switch your mortgage at the start of a month, you
may end up with a double interest-rate charge and have to pay interest
on your new mortgage as well as your old one,” Hollingworth
points out. Your solicitor should help you to avoid this situation.
Step-by-step guide
Step
1
Ask your lender if it could offer you a better deal than the one
you currently have. If you have come to the end of a special deal,
your lender will automatically switch you over to its standard variable
rate (SVR). This means that you will be paying a higher rate than
is necessary. Ask your lender if it will consider moving you to
a mortgage offering a better rate. This could work out cheaper than
switching to another lender, as there may not be any charges to
pay.
Step 2
Check if your lender charges a redemption penalty. This will help
you work out if it is worth switching. Redemption penalties are
common if you have a fixed rate, capped rate or discount mortgage.
You may have to pay a penalty even when the discount, fixed or capped
period has come to an end. If you have a high redemption penalty
to pay to your lender, this may outweigh the potential savings you
could make on moving your mortgage.
Step 3
Research new mortgage deals either online or through a broker. The
internet provides a good starting point for researching and comparing
mortgages. If you aren’t sure which is the best deal for you,
contact a mortgage broker or financial adviser. There may be a fee
to pay for the advice, but the adviser or broker may have access
to deals that aren’t available if you go direct.
Step 4
Subtract any redemption penalty and other costs such as property
valuation and solicitor’s fees from the savings you could
make. You may also have to pay an application fee, which can range
from £150 to £400. And if you are borrowing more than
90 per cent of the property’s value, there may be a mortgage
indemnity guarantee (MIG) premium to pay too. This will cover your
lender if you can’t pay your mortgage repayments. If you’ve
taken all the costs into account and can still make savings, it’s
probably worthwhile going ahead with a remortgage. If you don’t
want to do this yourself then you could ask your local mortgage
broker to work out the costs for you. You may be able to move to
a lender that offers a special package to remortgagers. This may
mean that fees are waived, or that legal fees will be waived if
you use the lender’s solicitor.
Step 5
Once you’ve chosen a mortgage, you will need to fill in an
application form. You must also decide how you want to repay your
mortgage – interest only or repayment. If your current mortgage
is an interest-only mortgage backed by an investment such as an
ISA or endowment, you can stay with the investment or choose to
switch to a repayment mortgage. If you do that, you have to choose
whether to continue paying into the endowment or ISA, or to close
it. If you close it, you may face penalties. Once the lender has
your
completed form it will make you an offer in principle.
Step 6
The lender will arrange to carry out a valuation on your home.
Step 7
You will need to contact a solicitor to carry out the conveyancing,
if it’s not part of the remortgage package.
Step 8
Your solicitor will negotiate with your existing lender and obtain
a redemption statement. You don’t need to talk to your lender
unless you are trying to get a better deal as your solicitor will
contact the lender on your behalf.
Step 9
Once the lender has received the valuation report it will
make you a formal mortgage offer. This will be sent to the solicitor,
who will pass it on to you.
Step 10
If you are happy with the offer then it is just a matter of signing
the
documents.
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