Remortgage tips

When the Bank of England’s base rate is falling, many homeowners with fixed-rate mortgages may be tempted to remortgage and switch over to a tracker mortgage with a lower interest rate.

If you’re one of them, it’s vital you do the maths, think ahead - and remember why you chose a fixed-rate mortgage in the first place. That’s not to say you should definitely stick with your fixed rate, but you certainly should think it through carefully.

Do the maths

How much would it cost you to remortgage? If your current contract mentions an ‘Early Repayment Charge‘ (ERC), that means you’ll have to pay your mortgage lender a certain amount if you exit your mortgage deal before a pre-defined time. And be aware that the tracker mortgage you’re looking at could well come with an arrangement fee. Depending on the size of these two figures, you could actually end up paying more than you’d save if you did remortgage.

Think ahead

What do you think lies ahead for the economy? Interest rates might be dropping now, but no-one anyone knows where they’ll be in a year. If they suddenly shot ‘through the roof’, the consequences for people with tracker mortgages could be severe - but people with fixed-rate mortgages would see no change at all to their monthly payments.

Of course, many people with tracker mortgages may be planning to keep a close eye on the base rate and switch to a fixed-rate mortgage as soon as it starts to rise, but is this really a safe strategy? If the base rate (and therefore the cost of their tracker mortgage) jumps several points overnight, they may well find that the interest charged on all new fixed-rate deals jumps just as much - and just as suddenly! In other words, the only fixed-rate deals available could be a lot more expensive than the one they’re on right now.

Remember why…

So remember why you chose a fixed-rate mortgage to begin with. Whatever happens to the economy, a fixed rate means your monthly mortgage payments won’t change.

After all, the base rate can only sink to zero - but there is (in theory, at least) no upper limit at all. Seeing your monthly mortgage payments drop by, say, £200, might be enjoyable, but what would happen to your budget if they suddenly rose by £200?

If you’re not certain you could afford that, then maybe you should stick with your fixed-rate mortgage. You won’t get to celebrate when the base rate goes down, but you won’t need to worry about it going up either - and when the economy’s going through an unpredictable period, isn’t it good to have a bit of stability in your finances?

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Debt

What should you do if you fall into arrears with your mortgage, or generally need help with your debts?

The below list features some of the people you can call to get help with debt.

• Citizens Advice Bureau - The CAB are a first port of call for many people. They may be able to give you advice on your options.
• Think Money - Think Money can provide you with help on mortgages, remortgages and debt.
• Gregory Pennington - Reputable debt management company who provide various debt solutions.
• Debt Advisers Direct - Debt Advisers Direct specialise in debt consolidation and debt management.
• Shelter - Shelter are a housing and homelessness charity.
• Your local council - Your local council may be able to help with housing and debt related problems.

Debt Consolidation

If you have loans, credit cards or store cards with different companies you can consolidate all these debts, making them much easier to pay off.

Benefits of a debt consolidation mortgage:

• Remortgage and release the cash tied up in your property
• Consolidate existing loans, credit cards & store cards
• One lower affordable amount to pay each month

If you have equity in your property you could remortgage and release cash to pay off existing debts. A debt consolidation mortgage can reduce your monthly outgoings without damaging your credit rating.

Click here to find out if you can get a debt consolidation mortgage.

Can I Remortgage to release equity?

Falling house prices don’t mean remortgaging isn’t an option. After all, those price decreases are coming after a decade of solid price increases! In other words, millions of homeowners have a substantial amount of equity in their homes – and for many, it could represent a good way of accessing the funds they need.

According to the Nationwide House Price Index, the average house price rose about £125,000 in the ten-year period leading up to the peak in October 2007. Today, leading experts like Graham Beale (Chief Executive of Nationwide Building Society) and the Centre for Economics and Business Research (CEBR) are predicting that house prices will stop dropping after they’ve fallen 25% from their peak price.

Assuming Nationwide’s ‘peak’ figure of £186,000 is accurate, that means the average house price should drop to around £140,000 – £46,000 lower than the peak price, but still around £80,000 higher than the 1997 price.

Plus, house price increases aren’t the only way people acquire equity: anyone who’s been paying off a repayment mortgage since 1997 will have repaid a substantial percentage of the capital.

Is remortgaging a good idea?

Of course, not every homeowner has owned their property since 1997. Some properties haven’t increased in price as rapidly as the ‘average’ property – and some have dropped a lot faster. Similarly, the prices of some properties will drop further and / or faster than others in the months ahead.

Everyone’s situation is different, and equity release isn’t always a good way to access funds, particularly when house prices are falling and no-one knows for certain how far they’ll fall.

Anyone who owes more on their home than it’s worth is said to be in ‘negative equity’ – a worrying situation, as it means they couldn’t pay off their mortgage by selling their property, so they’re likely to be stuck in that property until they’re out of negative equity (because the value of their house has increased sufficiently and / or because they’ve paid off enough of their mortgage debt).

So it’s always wise to stay out of negative equity by keeping enough equity in the house as a ‘safety margin’ against any future price drops.

Finally, there’s another side to equity release that people may overlook. Withdrawing equity through a remortgage will mean you owe your lender more than you used to. You might be able to remortgage at a rate that’s significantly better than the rate on your old mortgage, but you’re still very likely to end up paying more per month and / or paying your mortgage off for longer.

Unless you’re sure you can afford it, you’re risking your property – repossession may be ‘the last resort’, but mortgage lenders will repossess if you can’t keep up with your payments and there doesn’t seem to be any other way for them to get their money back.

In summary: a remortgage can be a good idea, but it isn’t always. Before you make any firm decisions, talk to a mortgage expert, who can help you take stock of your financial situation and make the right choice.

Should I remortgage if my home is losing value?

If you’re coming to the end of your mortgage terms, you’re probably thinking about your next step. You have a choice: you can either stand back and start paying your mortgage lender’s SVR (Standard Variable Rate), or you can remortgage and attempt to find yourself a better deal.

However, with the current uncertainty in the mortgage market and a recession looming, remortgaging can be complicated. Lenders are currently being cautious about their lending - so even if you have a proven track record as a homeowner, you may find that mortgage deals are now more expensive, and harder to come by.

With the average house price falling by over 10% in the past year - and further falls predicted by numerous analysts - many homeowners are at risk of negative equity, in which more is owed on a mortgage than the house is worth. Most people who took out 100% and 125% mortgages are already in negative equity, as well as many people who only put down small deposits.

If you are in negative equity, you will be unable to take out a remortgage. For example, it would be too much of a risk to the lender to renew the terms on a £150,000 mortgage on a house that is now only worth £120,000. If you come to the end of your mortgage terms and you have negative equity, your mortgage will run its course and you will automatically start paying your lender’s SVR.

However, assuming you have some equity in your home, remortgaging could still be a good idea - providing it is for the right reasons.

Remortgage for equity withdrawal

One reason many people remortgage is to withdraw some of the equity in their home. Your equity is essentially the percentage of your home that you own - including your deposit, any repayments you have made, plus any natural increase in value over the years.

After you have withdrawn equity, you will either have to extend your mortgage period to cover it, or spread the amount you have borrowed across your existing monthly payments. Either way, equity withdrawal will increase the amount you owe on your mortgage - so if house prices continue to fall, your risk of falling into negative equity will become higher.

That said, if you have a great deal of equity in your home then you can probably withdraw some of the equity in your home without too much risk of negative equity.

Remortgage to lower interest rates / increase repayments

A common reason for remortgaging is to change to a mortgage deal with lower interest rates. If you’re on a fixed-rate mortgage, it’s not always possible to change to a cheaper deal (depending on market conditions) - but you can reasonably assume that you will be able to find a cheaper deal than your lender’s SVR, which you will normally pay if your fixed-rate terms have come to an end.

Paying lower interest rates in itself will not protect you from negative equity. However, if you decide to pay more towards the mortgage itself (i.e. not including interest) - perhaps by shortening the repayment period on your mortgage, or simply by making regular overpayments - your equity will increase more quickly, thus limiting the potential damage of a decrease in your home’s value.

Remortgaging in a credit crunch

In the midst of the credit crunch, remortgaging can be a stressful experience for homeowners. The best interest rates are often only available if you are willing to pay a mortgage arrangement fee - and those on variable-rate mortgages can soon find their mortgage payments getting more expensive than they may have expected.

Lenders are being careful with their lending these days, but they are still being competitive. With that in mind, it makes sense to look around and ensure you are getting the very best deal on your remortgage.

Plan ahead

It’s essential you don’t leave your remortgage too late - any less than a month’s planning could leave you pressed for time. Ideally you should leave at least 2-3 months to go over your options, which gives you enough time to look at what’s available without rushing.

Find out all the costs involved

As with a new mortgage, there are many costs associated with remortgaging - so make sure you know exactly how much you are going to need.

Consider the mortgage arrangement fees associated with each deal. Many variable-rate mortgages come without an arrangement fee, but most fixed-rate mortgages do carry them. If you’re willing to pay an arrangement fee, a fixed rate is probably worthwhile, since it gives peace of mind over how much you will pay each month, and can usually be added to your mortgage payments. However, if interest rates go down, you may end up paying more than you would with a variable-rate mortgage.

You will also need to consider any ‘additional’ services offered with your mortgage, particularly PPI (Payment Protection Insurance). If you can afford to pay the extra each month, PPI is worth having - if something occurs that prevents you repaying your mortgage, the insurance should cover your costs, often for over a year. If it’s going to be a burden on your finances, though, it may be worth waiting until you are in a better position financially.

Make sure you’re safe if your payments go up

This doesn’t apply to fixed-rate mortgages, since the payments are the same each month - but there is a risk with variable-rate mortgages that if the interest rate rises, so will your mortgage payments. Make sure you have room in your finances for any unexpected rises, and expect your disposable income to take a hit if they do.

Some lenders offer a ‘cap’ on their variable rates, which could help you plan for the worst-case scenario (i.e. rates are as high as they can go).

Check for early repayment charges

If you are hoping to pay off your mortgage early, some lenders will ask for an ‘early repayment charge’ (also known as a ‘redemption penalty’. The idea behind this is that it makes up for what the lender would have gained in interest, had you continued with the mortgage as normal. However, these most commonly apply during fixed rate or discounted rate periods and many lenders offer deals which don’t include such charges.

Avoid mortgages with annual interest

Some mortgages work out their interest on an annual basis, meaning the amount of interest you pay every month is based on the money you owe at the start of each year.

Mortgages with daily interest charge you interest depending on how much you owe at any given time, so as you pay off more of the mortgage, the interest decreases with it. This might not make a huge difference at the time, but over the course of your whole mortgage, you will end up paying a lot less in interest - and the mortgage can technically be paid off years earlier.

This article was written by Melanie Taylor, a remortgage expert at Think Money