Remortgaging: a basic guide

A mortgage is almost always one of the family’s biggest items of household spending. With a new child in the home, it makes sense to check your home loan and see if it really does offer you the best deal.

Here are a few tips that can help.

Are you currently on a special deal?

At any one time, up to half, sometimes two-thirds of all borrowers are on a fixed-rate or similar offer from their lenders.

This means they are generally unable to switch mortgages, as the potential penalties for doing so outweigh any likely savings.

That said, a few borrowers might still gain from moving, especially if the deal they took out – while the best available at the time – was way more expensive than is available now. Sadly, that’s unlikely in today’s climate: most mortgages were cheaper two years ago.

Are you on a variable rate or similar?

Variable rates rise and fall broadly in line with changes in the rate set by the Bank of England every month. Switching from one of these home loans should involve no penalty as such, although you may have to pay an admin fee, usually ranging between £75 and £200, to close your mortgage with one lender and move to another.

How to calculate if you might be better off

  1. Add up your current monthly mortgage costs.
  2. Look for a better deal. The Financial Conduct Authority, the UK’s leading financial watchdog, offers a comparison service.
  3. Deduct the monthly cost of the new loan from the old loan and the amount left over is the BASE saving you could make each month from switching loans.

Is it really that simple?

Unfortunately not. Here are a few more things you need to do.

  • Make sure you are not comparing apples and pears: the mortgage term should be the same as you have left on your current mortgage, not 25 years all over again.
  • The admin charge for closing the old mortgage needs to be divided by the term of the new special deal. This is because the benefits of the new deal apply only for the period it is valid for. So a £120 fee spread over 24 months of the new deal is £5 a month.
  • Any application fees, legal and valuation charges on the new loan need to be divided against the term of the new deal, as above. So, total costs of £600 are the equivalent of £30 a month over two years.
  • Beware of any compulsory insurance mortgage deals. Home and contents insurance is always cheaper if you shop around.

How to cut existing mortgage costs without switching

What happens if you already have a loan and you can’t switch?

There are two main ways of reducing your monthly outgoings.

  • Move from a repayment to an interest-only loan. By not paying off capital your bill will be less each month
  • Stick to a repayment mortgage but extend the period of your loan.

Bear in mind that in both cases, your total interest bills will be higher as you are in effect not paying off anything you owe for a period of time. So you should see this as a temporary solution wherever possible. 

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Guest Saturday, 20 July 2019

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