All you need to know about the rewards of remortgaging
Almost two million British homeowners could benefit from remortgaging, but instead, are losing out on a small fortune by not switching to a more competitive rate on their mortgage. Lack of awareness, poor advice and fear all play a big part in the inertia amongst this group who are missing out on the potential rewards of remortgaging.
So what can be done? The truth is that it really pays to shop around when your current mortgage deal runs out as you could potentially end up saving thousands – yes, thousands – of pounds a year just by switching to a new lender. Sound good? Read on as we explain everything you need to know about the rewards of remortgaging.
Isn’t remortgaging really complicated?
In a word, no! Remortgaging simply means switching to a new mortgage deal – either with the same or a different lender. In principle, it’s just like switching your energy, mobile or broadband provider, only with the potential for much bigger returns – HSBC recently found that homeowners stuck on a standard variable rate mortgage could find themselves paying an average of £4,000 a year more compared to swapping to a new fixed rate deal.
So surely everybody’s remortgaging, right? Wrong! If you’re already considering remortgaging, you’re one step ahead of most homeowners in the UK. According to research by YouGov, 39% of Britons with a mortgage haven’t changed their mortgage in the last five years, and 13% have never changed.
The stark truth is that millions of Britons don’t even know how much their mortgage is costing them and they wouldn’t dream of switching to a cheaper deal. Why? Largely because they found the traditional mortgage process so fiendishly complicated the first time round.
Another barrier is that people simply don’t understand what remortgaging means – many think that it’s when you move home or take out a second mortgage. But the truth is you still have just one mortgage. All you’re doing is transferring from the company, bank or building society that originally lent you the money to another – and slashing your monthly payments in the process!
The aversion to remortgaging in the UK is reflected in the fact that a whopping 17% of people in the YouGov survey said they’d need to secure at least a 1% reduction in their mortgage interest rate to convince them to change – and 8% said they’d need the reduction to be 4% or more!
But the plain truth is that just a 0.5% interest rate cut on a 25-year £200,000 mortgage would result in savings of roughly £653 a year. And as an added incentive, the Bank of England is facing increasing pressure to hike interest rates from the current historic low of 0.25% to combat inflation. Such a move would push up the cost of borrowing for consumers, so it’s more important than ever for homeowners to get the best deal they can on their mortgage.
When should I remortgage?
The ability to remortgage is based on your individual circumstances. Generally, the most common time to remortgage is when the fixed or introductory tracker or discounted rate comes to an end. If you’ve had a mortgage for more than two years your introductory offer could have expired, leaving you on an SVR (standard variable rate). What does that mean? When your fixed term ends (usually two, three or five years), your initial rate is over and you’re then switched on to your lender’s standard rate – which is usually significantly higher.
It can take time to switch on to a new mortgage rate, so you should start looking into the available options well in advance – roughly 14 weeks to three months before your current rate expires. However, you don’t want to switch too soon because some mortgage terms include an early repayment charge if you switch while you’re still under contract. This charge can be as much as 2%-5% of your outstanding loan, so timing your remortgage right is crucial!
How do I remortgage?
The first step is to find out the details of your current mortgage. This might sound simple, but YouGov found that one-third (33%) of UK mortgage holders don’t even know what interest rate they are paying – with 7.6 million active mortgages in Britain, that’s a lot of confused people! Clearly there’s a widespread lack of knowledge among homeowners over the details of their mortgage, caused by the complexity and hassle of the traditional application process, and the estimated cost to consumers is a staggering £29 billion a year.
You should know the following details about your mortgage:
Whether it’s interest-only or repayment
Whether it’s a fixed or variable rate
How long the mortgage term is (in years)
Who the lender is
You can find all of this out by checking your mortgage statement or asking your lender for a redemption statement. Once you have the information to hand, you can test how much money you could save by using a mortgage calculator.
If you think you might be suitable for a remortgage and that you could save money, it could be time to take some professional financial advice. But you’ll also need to weigh up the costs of the process. These can sometimes include early exit fees, lawyer fees, broker fees and administration fees – so the actual savings might not be realised for some time.
Alternatively, you could use a fee-free brokering service, such as habito, which will give you totally impartial advice and show you the true cost upfront before you take any big decisions. It might also be worth approaching your current lender and asking if they’ll switch you to better deal terms. If the answer’s yes, they’ll send you a letter confirming the change to your contract terms.
The process of switching to a new lender is the same as applying for a new mortgage, so you can either go directly to the new lender or use a mortgage intermediary (broker) such as habito, which will act on your behalf with the lender.
You’ll need to be prepared with all the correct documentation and there’ll probably be a conveyancing fee from your solicitor as legal work is needed to change the original lender’s interest from the property to the new lender. However, most remortgages include a free legal package, so this might not add on any cost to you.
Once the remortgage has been accepted by your new lender, your solicitor will manage the transfer of money to pay off your old mortgage. And then the only thing left for you to do is decide what you’re going to do with all that money you’ve just saved yourself!
Customer stories: how we saved £2,400 a year
Lauren and James were on their lender’s standard variable rate of 5% for more than a year – until one of their friends suggested they check out habito to remortgage.
“When we bought our home, the mortgage process was more stressful than planning my own wedding!” says Lauren. “Remortgaging through habito was so different. We did most of it from the comfort of our sofa while watching TV. They came back with a rundown of the best rates and we compared them to our existing lender. We were shocked to discover that habito could save us more than £2,400 a year!”
“No one tells you about remortgaging. We always thought you remortgaged or switched lenders because you needed to release equity out of your home or were having financial issues, but we were wrong,” says James. “Over the past five years, the value of our property has already gone up by 30%. So now, with the savings we’re making on a monthly basis thanks to habito, we can make our maximum overpayments and add to our existing savings. In a couple of years, we’ll have enough money for a full deposit on our dream home outside London. We’d never have been able to save that much in five years without habito’s help!”
Want to see how some of habito’s other customers were able to save big just by switching their mortgage lender? Click on the video below for the full story.
If you think you could be eligible for a remortgage, click here to get started and start saving today.
I hope you enjoyed this guest article from habito.