When you remortgage, don't go back to the beginning again.
Concerned lovemoney.com user gavinb is worried that many readers aren't aware how much it costs you to increase the length of your mortgage back to where it started. You may be tempted to do this when you remortgage.
After you have run down, say, five years of a 25-year mortgage, you might decide you want to remortgage not just to get a cheaper deal and lower monthly repayments, but to go back up to a 25-year mortgage. With the repayments more spread out, the monthly repayments come down further.
Perhaps you even believe that you have to do this when you remortgage. This isn't true. What's more, it costs you a fortune.
I have shown in The £20,000 cost of remortgaging that the fees and other costs involved in constantly remortgaging can add up to £20,000 over the life of the mortgage, but remortgaging can also reduce the interest you pay by £30,000 to £50,000, making a net saving of £10,000 to £30,000 for your efforts.
However, this is only the case if you keep the same number of years outstanding when you remortgage, e.g. if you have 15 years left, your new deal should also be a 15-year remortgage.
Here's what will happen if you extend your mortgage
Let's say you have 20 years left to run on your 25-year mortgage and you have £120,000 debt outstanding. If you remortgage to a new deal and stick with 20 years, your repayments today might be in the region of £760pm (depending on your interest rate and other costs).
On the other hand, if you increase your mortgage to 25 years again, you can spread out the monthly repayments and save a useful £100 per month.
However, the cost over the long run is substantial. You are likely to pay about £20,000 extra in interest, completely wiping out the benefit to your wealth of remortgaging.
This is why overpaying is so powerful. By paying faster, yes, the monthly repayments are higher, but because you pay interest for a shorter period, you pay far less overall. You could easily save £20,000 by remortgaging five years shorter instead, or by taking advantage of any flexibility to overpay by about £100pm.
I don't think that 30 years is an unreasonably long time to pay off a mortgage. You are making a hugely expensive purchase, after all, which ultimately will make you far wealthier by permanently removing the necessity of paying ever-increasing rents for the rest of your life.
But you will be in a much more comfortable position going into retirement if you save tens of thousands of pounds by resisting the temptation to take longer to clear your debts. Either that, or you could have a good number of very fancy holidays.
Other benefits to paying faster are that you can reduce your chances of getting into negative equity (or get out of negative equity faster), and you make your financial position safer: with less debt, in an emergency you're more likely to be allowed to borrow more cash.
All the same principles can be applied to your other debts. As I explain in How to spend less and still have more, the less debt interest you pay, the richer you will be, or the more things you can buy for yourself – not just while you're repaying your debt, but for the rest of your life. Repaying your mortgage faster reduces the interest you pay significantly, and so you will be richer and/or have more money for fun stuff up to the day you die.
More: compare mortgages through lovemoney.com | The £20,000 cost of constantly switching mortgage | The five biggest pension mistakes
10 top fixed and 10 top lifetime tracker deals
|
Lender |
Deal |
Maximum loan-to-value |
Fee |
|
1.99% fixed for two years |
75% |
£1,999 |
|
|
3.09% fixed for two years |
80% |
£500 |
|
|
2.79% fixed for three years |
65% |
£1,499 |
|
|
2.99% fixed for three years |
75% |
£95 |
|
|
3.49% fixed for four years |
70% |
£995 |
|
|
3.89% fixed for four years |
75% |
£0 |
|
|
3.39% fixed for five years |
75% |
£995 |
|
|
3.69% fixed for seven years |
70% |
£195 |
|
|
5.49% fixed for seven years |
85% |
£0 |
|
|
4.19% fixed for ten years |
75% |
£995 |
|
|
2.49% tracking base rate +1.99pp* |
60% |
£0 |
|
|
2.55% tracking base rate +2.39pp* |
60% |
£945 |
|
|
3.39% tracking base rate +2.89pp* |
70% |
£0 |
|
|
2.95% tracking base rate +2.45pp* |
70% |
£995 with £250 cashback |
|
|
2.89% tracking base rate +2.39pp* |
70% |
£945 |
|
|
2.99% tracking base rate +2.49pp* |
80% |
£599 |
|
|
3.29% tracking base rate +2.79pp* |
80% |
£0 |
|
|
3.19% tracking base rate +2.69pp* |
80% |
£945 |
|
|
4.59% tracking base rate +4.09pp* |
90% |
£599 |
|
|
4.99% tracking base rate +4.09pp* |
90% |
£0 |
*pp: percentage points
Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online.
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 freephone 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.