Should I remortgage my home? Low interest rates drive record remortgage numbers
The number of people remortgaging has hit record levels in recent months. Why is it such an attractive move at the moment? And should you follow suit?
Remortgages almost doubled year-on-year in the second half of 2015, according to figures from a major mortgage lender.
Yorkshire Building Society’s data shows the summer remortgage surge continued for the rest of 2015, with applications increasing by an incredible 94% in the six months to 30 November, compared with the same period in 2014.
And that remortgage rush was driven by low rates. According to financial analyst Moneyfacts, last year saw mortgage rates drop to an all-time low in July. Borrowers needing to borrow a high percentage of their home’s value saw the biggest rate cuts, but borrowers at all loan-to-values (LTV) saw rates fall.
So should you join the remortgage rush? What do you need to think about before taking the plunge?
What is remortgaging?
Remortgaging is the process of taking out a new mortgage to pay off your existing home loan.
The most common reason for remortgaging is to save money and, for some, the savings can be significant.
Let's take an example. If you are currently paying a rate of 4% on a mortgage of £200,000 over 25 years, you’LL be paying £1,056 a month. If you remortgaged to a product with a rate of 2%, the monthly repayment would fall to £848, a saving of more than £200 a month or £2,400 a year.
However, there are pros and cons to remortgaging.
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Advantages of remortgaging
Most people remortgage when a fixed rate comes to an end. At the end of a fixed period, most mortgages revert to the lender’s standard variable rate (SVR), which will probably be higher than the fix. So remortgaging to a decent rate means you won’t suffer payment shock when the rate increases.
Another set of borrowers who will save money by remortgaging are those who have seen the value of their property significantly increase. This will put them in a lower LTV band – in general, the lower the LTV, the lower the mortgage rate.
Another advantage to remortgaging is to protect yourself from future rate rises by choosing a fixed rate. Alternatively, some people remortgage to borrow more money, for example to fund home improvements or consolidate other debts.
Disadvantages to remortgaging
Presuming you can save money by remortgaging, the main downside to switching lenders is the hassle factor.
Since the Mortgage Market Review in April 2014, getting approved for a mortgage has become a much more onerous process. Lenders will want to see not just evidence of your income, but affordability. To do this they will go through your monthly spending with a fine toothcomb – borrowers with other financial commitments such as childcare and debts will find it harder to get a mortgage than people with less commitments and more disposal income.
How much a new lender will pry into your income depends, but there is anecdotal evidence of lenders asking how often you eat steak or whether you could live without your contact lenses.
Certain groups of borrowerS may have difficulty remortgaging. These include those with less equity in their property than previously, or who have had recent credit problems. Borrowers who have recently gone self-employed may find it difficult to find a lender to accept them.
Some borrowers will already be on such a competitive rate – particularly lifetime trackers taken out prior to 2009 – that they have little to gain from remortgaging.
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Do the sums add up?
Before you remortgage you need to check whether you can leave your current lender penalty-free. As a general rule of thumb, you’re likely to be tied in to your current lender for the duration of any fixed rate – so if you have a five-year fix you’ll be tied in for five years.
If you choose to leave during a tied-in period, redemption penalties or early repayment charges (ERCs) will apply. Normally a percentage of the outstanding loan amount, these charges can significantly reduce the savings you make by switching deals.
You also need to factor in any arrangement, valuation or completion fees charged by your new lender. These fees can total thousands of pounds, depending on which mortgage product you choose.
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What’s on offer?
There are some pretty decent remortgage rates around at the moment. Yorkshire Building Society has a two-year fixed rate at 1.14% with a £1,345 fee, available to borrowers with a 35% deposit. For borrowers looking to minimise upfront costs when they remortgage, there is a 1.59% two-year fixed rate which has no product fee, and no standard valuation or standard legal fees from the same lender.
Alternatively Virgin Money is offering a three-year fix at 1.99% with a £995 fee for borrowers with a 35% deposit. Those who’d prefer to fix for five years should consider Coventry Building Society’s five-year fix at 2.34% at 65% LTV and a £999 fee.
For borrowers who want to take a punt on a variable mortgage, Woolwich has a two-year tracker at the Barclays base rate plus 0.89%, giving an initial pay rate of just 1.39%. After two years it reverts to the base rate plus 1.99%. It comes with a £999 arrangement fee and borrowers need a 40% deposit or equity to be eligible.
To see which mortgages you qualify for, head over to the loveMONEY mortgage centre today.
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