Remortgage Guide
Why Remortgage? Will switching my mortgage really save me money? What charges are associated with switching mortgages? Releasing some of the equity in your property A more flexible mortgage Timetable of events associated with switching mortgagesA long time ago, people would go and visit their building society to apply for a mortgage, after much form filling and question answering, in most cases their application was granted and some twenty-five years later, the mortgage was paid off and both the building society and the ex mortgager were happy ever after.
I don’t believe in fairy tales I hear you shout, and yes, how different it all is today.
There are literally hundreds if not thousands of different types of mortgages on offer today, all calling to you saying ‘I am the one for you’, and maybe they are. The old days of one mortgage over the twenty-five year period have gone and you can switch mortgage providers when you want to, providing of course it makes sense to do so.
| Why Remortgage? | Top |
There are generally four reasons that people look to remortgage their property
1. To release equity in your property
2. To move to a mortgage with more flexible payment terms.
3. Your existing mortgage provider’s rate is a standard variable rate and you want to change to a fixed rate.
4. You want to switch to a mortgage that offers a lower rate than you are paying with your present mortgage provider.
For the last few years, it has been possible to switch mortgages to one of the thousands of remortgages on offer. Lenders competed with each other by offering all sorts of remortgage products to entice you away from your present mortgage provider. However, due to the credit crunch, there has been a sharp decline in the number of mortgage products on offer, coupled with this, lenders have become far more stricter in their lending policies making it harder to obtain a mortgage.
Another result of the credit crunch is that interest rates on fixed and discounted rate mortgages have also risen due to higher interest rates in the money markets. Putting all this together means that is becoming far more difficult getting a competitive remortgage, but they are still around if you are prepared to research the mortgage market.
| Will switching mortgage really save money? | Top |
There is no doubt that in certain circumstances you can save money by remortgaging. For those of us who want to borrow quite a large amount of money running into tens of thousands of pounds, may still find that the cheapest way of achieving this is to extend or switch their mortgage. A lender should have no problem with this providing you have sufficient equity in your home. Take into account, however, that you will be paying interest for a much longer period than that of a standard personal loan and therefore it could cost you more.
There may be early repayment charges and reservation fees demanded by your old and new lenders. You may face penalties as well as arrangement fees. Don't forget to add in surveyors' and solicitors' fees. So, if you're considering a remortgage, do your sums carefully. You may find yourself paying out in fees and charges the equivalent of several months' mortgage repayments, taking a serious chunk out of the financial benefits of remortgaging.
Before you rush into any deal involving remortgaging , ask yourself whether any saving you make might be eroded by the costs of moving your debt. You need to take into account just exactly what your requirements are regarding remortgaging, just because a remortgage offer appears cheaper than your existing mortgage may not neccessarly be the ideal solution for you. It pays to take account of your specific set of circumstances when choosing to remortgage your home.
Now, your present mortgage provider may charge you a penalty for switching. You need to get a redemption statement from your present lender. With this, you can find out how much you still owe on your existing mortgage and what the cost of remortgaging will be.
| Charges associated with switching mortgages | Top |
Charges associated with your existing mortgage provider
• Early repayment charge (ERC) is an early redemption penalty and can amount to several hundreds or thousands of pounds. If an ERC applies to you, it may not pay you to switch mortgages as the cost of the ERC outweighs the savings made in paying a lower rate. An ERC is usually raised if you have a mortgage with a fixed, capped or discounted rate. However, some mortgages lock you in after the initial offer rate has finished, so you could end up paying an ERC even if you're on the lender's standard variable rate.
• Additional charges - Admin fees, discharge fees, deeds fees can all be raised by your existing mortgage provider when you switch mortgages. Costs vary, but you need to budget for around 300 GBP – 500GBP
Charges associated with your new mortgage provider
• Valuation fee All mortgage providers require a valuation of the property they are lending on, to make sure that at the very least, the property is worth the loan. Depending on what the policy of your new lender is on valuation fees, will determine how much the valuation fee will cost you. Some lenders will charge you around 150 GBP on the valuation of a 150,000 GBP property, other lenders will refund you the valuation fee as an incentive to switch.
• Arrangement/booking fees - most fixed and capped rate remortgages have a booking and/or arrangement fee. These vary from lender to lender but can range from £99 to £5,000. Some mortgage lenders now charge a percentage of the amount you borrow - for example 1-1.5%. Be aware of these charges as they can make switching mortgages expensive.
• Higher lending charge (HLC). If you intend to borrow more than 75% of the value of your home, depending on your new lender you could pay a higher lending charge.
• Legal fees you will need a solicitor to take care of the legal aspects when switching mortgages. The same solicitor will also usually act on behalf of the lender to check that you have title to the property, and there is no reason why the lender shouldn't lend on your property. This involves carrying out searches such as a local authority search. You'll be responsible for all the legal fees including the cost of the searches and land registry fees. But some deals will offer a refund of legal fees as an incentive to switch, provided that the switch is a straightforward one. In order to get a full refund, you might have to agree to use one of the solicitors on the lender's list.
One way to reduce the charges associated with switching mortgages is to see whether or not your existing mortgage provider can offer you a better deal. Make an appointment to see them and take along the details of the mortgage you are thinking of switching to. It may well be that you can negotiate a better deal for yourself, and if you can, then you will reduce the cost of some of the charges associated with switching, for example solicitor fees.
| Releasing some of the equity in your property | Top |
If the value of your home has gone up since you bought it, the equity in your property will have increased over time. If you want to access some of this additional equity that has built up within your property, you could switch mortgages which would allow you to get a better deal and at the same time release some additional equity.
Take the following example, your house is worth £250,000 and your outstanding mortgage is £125,000, therefore you have £125,000 equity. Let us say that you need 25.000 GBP for a new car, or boat, or world cruise (you deserve it).To raise the cash you could approach a lender to get a new mortgage for £150,000. This will release £25,000 of equity in your property which you can use for whatever purpose you like.
It is worth noting that there will be a limit on just how much the lender will lend you as this will be based on your income and also a maximum loan-to-value (LTV).
Because of the credit crunch, most lenders will lend only up to 95% of the property's value (a 95% LTV) and increasingly this figure is dropping to 90%.
If you find a lender who is willing to offer you a mortgage at a lower interest rate than your present mortgage, and you are not borrowing much more, it may well be that the savings in interest cancel out the cost of the extra borrowing. If it does not, it is vitally important that you can afford to borrow the extra amount, as if you default on the repayments, you are putting your property at risk.
Another issue to remember is that if you have got an interest-only mortgage, you will need to increase your payments to your investment associated with paying back the capital, to cover the extra you have borrowed.
| A more flexible mortgage | Top |
As time goes by, your circumstances regarding financial matters also change, so the mortgage you took out some ten years ago may not be best suited for you today. It may well be that your income has increased over the years and you are now in a position to pay off your mortgage at a faster rate. A flexible mortgage allows you to increase payments when you can afford to, and may let you reduce or even miss payments for a while.
Another option is a current or offset mortgage, this type of mortgage allows any savings you have, or your salary to be offset against your mortgage debt, and therefore reduce the amount of interest you pay.
| Timetable of events associated with switching | Top |
Form Filling
The first step towards switching mortgages is to fill in an application form from your prospective new lender.You will have to provide proof of identity and details of your income such as bank statements and salary slips. Your prospective lender will then run a credit check on you to make sure you are creditworthy to be lent the amount you have applied for.
Paying out fees
After you have completed your application forms, depending on the deal regarding you remortgage will determine what fees you have to pay out. Unless part of your remortgage deal includes a free valuation, you will have to pay for one. (Some lenders refund the valuation fee after completion.) Another fee you may be liable for is an arrangement fee or booking fee, and if you are borrowing a high proportion of the value of your property, you could incur a higher lending charge.
The offer of a mortgage
Now, assuming that you have passed all the credit checks and met all the critera the lender requires, the next stage is that the lender makes you a mortgage offer. Provided that the lender is happy to lend to you the mortgage you have applied for, they will issue you with a mortgage offer and a Key Facts Illustration showing you the pros and cons of the mortgage you've chosen. Check this over carefully to make sure that it is what you want and you fully understand what you are getting yourself into. Once you have decided that the offer is the right one for you, then you will need to sign and return it. Remember, you are not legally bound by the offer, so you could withdraw if you change your mind. However, bear in mind that if you do so, you will lose any non-refundable fees that you had to pay.
Time for the solicitors to earn their money
You usually have a choice about which solicitor you want to take care of the legal aspects. Some lenders will have a panel of solicitors they use on a regular basis who you can choose from. Otherwise you can appoint your own solicitor. Please note that whoever you appoint will act for both you and the lender.
The solicitor that you have choosen will ask your existing lender to send the title deeds and a redemption figure. This amount will include what is outstanding on your mortgage plus any fees and penalties. They will also carry out the necessary searches such as a local authority search.
Setting a time
A date will be set for completion of the re-mortgage.
Signing on the dotted line
You will then be asked to sign the mortgage deed.
More legal work
Your solicitor will confirm to the lender that you have title to the property and that it is safe for them to lend you the money.
Give me the money
Your solicitor will ask for the funds from the new lender and, on the day of completion, will send these to your existing lender. If you have borrowed extra funds, the solicitor will release these to you on or shortly after completion.
