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 Switch and save September 2004 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.switch withwhich.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, then 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. 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 mortgage 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, 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. 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, then you will be given the name of the solicitor dealing with your transaction. If not, then you will need to employ your own solicitor to carry out the remortgage for you. You will need 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. 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. Remortgaging step by step Ask your lender if it could offer you a better deal than the one you currently have Check if your lender charges a redemption penalty Research new mortgage deals either online or through a broker Subtract any redemption penalty and other costs such as property valuation and solicitor’s fees from the savings you could make. If you can still make savings, then it’s probably worth while going ahead with a remortgage. If you don’t want to do this yourself you could ask your local mortgage broker or use the service offered by Charcol. 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. Remortgaging step-by-step Ask your lender if it could offer you a better deal than the one you currently have Check if your lender charges a redemption penalty Research new mortgage deals either online, from the tables on page 70, or through a broker Subtract any redemption penalty and other costs such as property valuation and solicitor’s fees from the savings you could make. If you can still make savings, then it’s probably worth while going ahead with a remortgage. If you don’t want to do this yourself you could ask your local mortgage broker or use the service offered by Charcol Once you’ve chosen a mortgage you will need to fill in an application form and the lender will make you an offer in principle The lender will arrange to carry out a valuation of your home You will need to contact a solicitor to carry out the conveyancing 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. Once the lender has received the valuation report it will make you a formal mortgage offer. This will be sent to the solicitorIf you are happy with the offer then it is just a matter of signing the documents Once your mortgage has been successfully transferred you will get a completion notice which will confirm your new monthly payments
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