Remortgaging - what you need to know
What is remortgaging?
'Remortgaging' is taking
out a new mortgage with a lender without moving home. It can be used if you want
to borrow more money (perhaps for home improvements) or to reduce payments. You
can reduce payments by switching to a mortgage with lower interest rates, or
extending the period of the loan, or to consolidate debts (including those
involving credit cards which attract a higher rate of interest).
You will need to have equity in your
home to qualify, however, if you intend to have a separate rather than
replacement loan. As a rule of thumb, if the value of your home exceeds any
outstanding charges on it, a lender will offer you a loan of up to two-thirds of
the balance.
Remortgaging is a growth industry and
there are many lenders offering deals which may look attractive. With mortgage
interest rates about the lowest they have been in years, the Consumers'
Association reports that 37% of new mortgage loans are for people switching
their mortgage.
Competition is great, and as a
'homeowner' if you shop around you may be able to make savings on your monthly
mortgage repayments by switching to one of the many deals offered. Before
signing up, however, you should consider the points in this leaflet.
Different types of remortgage
A mortgage is made up of the capital -
which is the amount of money borrowed, and the interest - the amount of money
which is charged on the capital until you pay it back. There are different types
of mortgages, e.g. repayment, endowment, pension and interest only.
-
The interest rates on these can be
as follows:
-
Variable - this rate may go up or
down when the lenders change their interest rates.
-
Discounted - the discount is
normally for a short period and then your payments switch back to the
lender's usual variable rate.
-
Fixed - for a specific period, e.g.
one to five years or even longer. After this period the rate normally
changes back to the lender's usual variable rate.
-
Capped and Collared - the maximum
(Capped) and minimum (Collared) rates of interest are fixed for a certain
length of time.
The costs of remortgaging
Lenders may offer to pay your valuation
and legal fees and even offer cash-back. However, if these are not offered it is
worth bearing in mind the costs of the following:
-
Valuation fees
-
Legal fees
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Other fees - these may be payable
for local authority searches, Land Registry (search, re-registering with the
new lender's details and copy entries), Land Charge Search Fee and bank
charges. In addition, arrangement/application fees may be charged by the new
lender Your existing lender may also charge Reference and Deeds Release
fees.
-
Insurance
The homebuyer should consider up to
four types of insurance cover:
You may have to pay this premium where
the loan exceeds 75% of the value of the property, and it can be costly.
Borrowers should consider taking some
form of mortgage protection insurance (a life assurance policy), so that in the
event of their death the mortgage will automatically be paid off.
If you remortgage, you will not receive
any help from the state with your payments for the first nine months, if you
fall ill or lose your job. This insurance will cover mortgage payments in the
event of an accident, sickness or redundancy usually up to a period of twelve
months. It is often compulsory where the amount borrowed exceeds 90% of the
value of the property, but it is wise to check exactly what the insurance does
cover.
Your lender will require the property
to be covered by buildings insurance, and some may suggest a combination of both
contents and building insurance through a household policy. With some lenders
this is compulsory and the lender may charge an administration fee. If you go
elsewhere, but shop around - you may find the money you save makes it
worthwhile.
Other possible costs
Penalties for early settlement of a
mortgage may be high and can vary between lenders. They can include repaying the
valuation and legal fees, and any cash-back to the lender, together with
additional charges which could amount to between three and six months of extra
interest. Amounts vary, but they could be as much as £5,000 on the average
property if remortgaged to the maximum. In addition, check for any redemption
conditions before you enter into the mortgage as you could be 'locked-in' to
these deals at their usual variable rate for many years.
Challenging contractual terms
If a redemption penalty appears to be
excessive or you feel that you are otherwise being treated unfairly, you may
challenge the lender's decision by referring the matter to the Financial
Ombudsman Service (details below) which oversees most of the major banks and
building societies. The service may be able to resolve the dispute between you
and the original lender without court action and at no cost to you.
A particularly restrictive term may
also be deemed unfair if it fails tests under the Unfair Contract Terms Act
1977, or the Unfair Terms in Consumer Contracts Regulations 1999, and could be
challenged in court or by referral to the Office of Fair Trading (details
below). The Office of Fair Trading's review and recommendations to the lender
are also at no cost to you.
What should I do?
Shop around, consider telebanks,
financial advisers, using the Internet, as well as high street banks and
building societies. Ask for all the facts and figures to be put in writing.
Check out remortgage deals carefully -
you may not save as much as it first appears. Watch out for redemption penalties
and long 'lock-in' periods. Is there an early settlement fee payable on your
existing mortgage?
Compare the costs with the savings, and
remember costs need to be paid up-front whereas savings will not be immediate
but made over a period of time.
Consider that you may get a better deal
(and lower interest rates) by paying your own fees.
Generally, a better deal can be
obtained where the borrower owns a reasonable amount of equity in the property.
Beware of 'best buy' mortgage tables in
the press - they may not give you the complete picture.
You may wish to approach your existing
lender to see if they can offer you a better deal!
Above all do not over commit yourself -
remember that your monthly repayments will almost certainly go up at the end of
the discounted or fixed rate period.
Contact www.mortgage-remortgage-online.co.uk for
more info
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