How To Remortgage
May 19, 2006
Referred to in everyday language as 'the bloody mortgage', a mortgage is unfortunately a fact of life for most of us. What isn't a fact of life, however, is being tied into a bad mortgage.
Depending on its size, a bad mortgage could be costing you hundreds or even thousands of pounds a year. In fact, re-mortgaging is often the most effective way you can save yourself a substantial amount of money.
Check out your current deal
Before you start you need to establish exactly where you stand at the moment. You've probably got a fair idea of the amount you're paying each month but most people don't know what the interest rate they are paying or how much is outstanding on their mortgage. You can find this information by calling your mortgage company or checking your latest annual statement.
If your mortgage is relatively new you may be tied into a special rate deal. Often there are penalties for moving mortgages while you're in this honeymoon period. Some lenders even charge redemption penalties after the special rate has ended. So you need also need to find out these details.
Finally, many lenders also charge a fee for the standard closure of a mortgage (on top of any redemption penalties). In fact, many have hiked these fees recently in an attempt to dissuade people from moving their business elsewhere. You'll also have to include these costs in your sums.
Check out some new deals
If you're paying your lender's Standard Variable Rate, as most people with a mortgage are, you probably paying around two percentage points more in interest than the cheapest deals on the market. In other words, on a £100,000 mortgage, you could be paying £2,000 more each year in interest than you need to.
Have a look at some of the Best Buys deal here in our mortgage centre and see what you can save. The cheapest rates are usually available to people with low 'loan-to-value' rations (LTV for short). Divide the current amount outstanding on your mortgage by the estimated value of your home to calculate your LTV rate.
Unfortunately, you'll probably have to pay some fees to switch to a new mortgage. There's likely to be an application fee for a new mortgage (which could be £500 for the cheapest deals on the market), plus legal and valuation fees.
Compare the monthly costs
Having talked about the costs, now we come to the fun part. Here's where you see how much money you could save each month. Get some quotes from a shortlist of two or three lenders and then compare them to your existing deal.
Note that if you have a repayment mortgage, rather than an interest-only one, you have to make sure you're comparing like with like. If you have 20 years left to run on your current deal then you need to compare this with a new 20-year deal. If you compare it to a new 25-year mortgage you'll get a false impression of how much you'll save and end up taking five more years to pay off your mortgage. Not good!
Do your sums
Here's the final maths bit. You'll need to add up the costs that will charged by your current borrower plus those you'll incur for a new mortgage. Let's say they are £500 apiece, meaning your total switching cost is £1,000. (You'll notice that many of the fees associated with moving mortgages are the same, whatever size loan you're after. This means you far more likely to save money if you have a bigger mortgage.)
Now you need to compare this total to your monthly saving. If you reckon you can save £200 a month then your remortgaging masterplan will pay for itself in just five months and from then on you'll be £200 a month better off. Of course, the cheapest mortgage deals often only last for two or three years so there will come a time when your special deal comes to an end and you may have to consider remortgaging again. Depending on how cumbersome you find the whole process you may want to go for a five-year deal instead. Although you'll save a bit less each month you may end up better off as you won't incur remortgaging costs as frequently.
Go back to your current lender
Now you know how much you can save it's a good idea to talk your current lender. They'll still want your business so they may be prepared to offer you a lower rate. In fact, they may even be prepared to switch to one of their cheaper deals without charging you all the additional fees that you'd normally pay.
If they won't play ball, or if switching to a new lender would save you even more money, then it's time to kiss your lender goodbye!
Save yourself even more money!
Here's one trick you can use to save yourself even more money in the long run. Find yourself a cheaper deal but aim to pay the same amount of mortgage each month as you are at the moment.
What's the point of that you may ask? Well, doing this with a lower interest rate will mean that you could pay off your mortgage a few years earlier. This will potentially save you several thousand pounds more in interest and bring forward the joyful day when you own your own home outright. Hurrah!