Five reasons why you need to remortgage today

If you remortgage sooner rather than later it could prove a very smart decision.

Remortgaging can be a savvy financial move, but in the last few years it has fallen out of favour with Brits.

The benefits of switching became negligible when interest rates (and mortgage rates) fell massively during the credit crunch. Borrowers found that they automatically reverted onto super low standard variable rates (SVRs) that they were unable to better by remortgaging.

However, things have changed in the last six months and remortgaging has become increasingly attractive. Below are five compelling reasons to switch your mortgage now:

1. Lenders’ SVR hikes

When Halifax announced in March that it was increasing its SVR from 3.49% to 3.99% from 1st May, there were fears that it would trigger a domino effect across the market. A few other prominent lenders also hiked their rates including Royal Bank of Scotland, Bank of Ireland Mortgages and Yorkshire and Clydesdale Banks. And just last week the Co-operative Bank increased its SVR by 0.5% to 4.74%. Chances are more will follow.

Well over a million borrowers are directly affected by the increases, but the real impact has been much wider. What the hikes clearly demonstrate is that your lender can do whatever it wants with its SVR, regardless of wider interest rates.

If you have a reasonable level of equity (over 20%) you could probably do better by remortgaging to a new deal. Of course it depends what you currently pay and what deals are available to you, but unless you either pay a very low SVR or long-term tracker, or you have little or no equity, switching is likely to save you money. And if you move to a fix or tracker your lender cannot control what happens to your pay rate.

2. New mortgage rates are rising

In addition to lenders hiking their SVRs, they also continually reprice their mortgage deals. Most deals are valid for around a month or so before they are withdrawn and the lender launches a new range.

And new mortgages have generally been repriced upwards in 2012. The average fixed rate today is 4.7% compared to 4.48% in January according to Moneyfacts, despite the fact that Swap Rates - one of the major factors in the cost of lenders’ fixed rate funding – have marginally decreased over the same period.

New variable mortgage rates have also increased from 3.65% in January to 3.92%, while the base rate hasn’t budged and the London Interbank Offered Rate (LIBOR, the rates at which banks lend to each other) has fallen.

Despite this, mortgage rates are still historically low and there is enormous potential for them to rise even further when wider interest rates actually do start to increase.

If you see a decent remortgage deal, remember it could be here today, gone tomorrow.

3. Make the most of low rates while they last

Flexibility may not sound like something you really require in a homeloan, but if you switch to a flexible mortgage it could change the way you repay your debt, save you money, and shave years off your mortgage term.

That’s because truly flexible mortgages allow you to overpay whenever you want to and without limits. That doesn’t sound too exciting but the cumulative effect of reducing your debt and therefore the interest you are charged is enormous – overpay by £100 a month for example and you could save over £25,000 and shave three and a half years off your mortgage (based on a 25-year £200,000 repayment mortgage at 5%).

Fully flexible mortgages have really come into their own in the current economic environment, because they let you overpay now while rates are low and many borrowers have surplus money. This gives you an invaluable buffer that will protect you in the event of rates rising, or if you fall into financial difficulty.

Indeed a fully flexible mortgage lender will usually allow you to underpay your mortgage for a while, assuming you have already made sufficient overpayments.

4. Release equity

Releasing equity is a perennial motivation for switching your homeloan. In practice what you are actually doing is replacing your mortgage with a larger one and pocketing the difference.

For example, say you have a mortgage of £100,000 on a property worth £200,000. Your lender may be willing to let you extend it to a larger homeloan of £130,000 for example and would pay you £30,000 in cash.  Of course, this assumes that your income and credit history stacks up.

Releasing equity is used for many reasons, from funding home improvements to consolidating debts – so you can release equity and use it to pay off your credit cards and loans. Whatever the reason, releasing equity is a useful way to access money that is tied up in your home. But remember, it will increase the size of your mortgage and your monthly repayments, so make sure you don’t overstretch yourself.

5. Switch while you have the equity!

The more equity you have the better the mortgage rate you can access. This is because lenders reserve their best deals for the lowest risk borrowers.

However a sharp change in what your property is worth can alter your loan-to-value (LTV) ratio quickly, and the current outlook for UK house prices is not exactly rosy. In fact, most experts predict that house prices will fall this year, with some areas faring worse than others – the north of England is expected to fare particularly badly.

Why does this matter?

To have a good choice of mortgages you require equity of at least 25%. If you are currently hovering around that level (eg £50,000 equity on a property worth £200,000) you are vulnerable to falling into the next LTV tier, and mortgages are much more expensive for those with less than 25% equity.

So if prices are falling in your area your mortgage options could be severely restricted if your property loses value. If you are weighing up the pros and cons of remortgaging, moving quickly could enable you to get a much cheaper mortgage deal.

Fifteen fabulous remortgage deals

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At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 8045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article.

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term may revert to the lender's standard variable rate or a tracker rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.

Your home or property may be repossessed if you do not keep up repayments on your mortgage