This content originally appeared in the MSE weekly email on 29 April 2015.
The world downturn has a silver lining for existing mortgage holders as remortgage rates (where you switch mortgage to save) are rock-bottom. EVERYONE check now if you can save, as changes are afoot.
This is most crucial for the four in 10 mortgage holders who pay the SVR (standard variable rate). These average 4.9% but can be 6%. Savings can be huge as MoneySavers have found...
- Damian: "Followed your remortgage tips and formula; now pay £431/month less."
- Jan: "Thank you. Reduced payment by £600/month and now paying that extra into mortgage so we'll be clear in 15 years, reduced from 20 years."
- Sarah: "We saved £500/month by remortgaging to a new five year fix. Saving £30K in five years. It was a painful experience but would recommend the pain."
Yet don't linger, as I explain below, it is far from certain the availability of cheap deals will be around in future times...
1. Check your current deal.
A mortgage is the biggest expenditure most people have, so I'm always slightly surprised that when asked not everyone knows their rate and details. So check now that you know...
a. The current rate: And monthly repayment and amount outstanding.
b. Type: Is it a fix, discount, tracker or on an SVR?
c. Deal deadline: If it's a short-term deal (eg, a 2yr fix), when does it end?
d. Term: How long is the term, eg, 25yrs, and when will it be fully repaid?
e. Penalties: Are there any early-repayment penalties?
f. Your loan-to-value (LTV): The proportion of your home's current value you are borrowing. Eg, £80,000 outstanding on a £100,000 property is an 80% LTV. The lower the LTV, the better deal you can get. So if your home has increased in value you may gain. See LTV help for full info.
Everyone should check, but not everyone can save by remortgaging (shifting to a better deal). Yet armed with information, you can then see if a better deal is available. For more help, or if you don't understand this, get my FREE 60-page MSE Remortgage Booklet 2015, (either instant PDF or order printed copy.
2. New EU rules may create mortgage prisoners.
It's now a year since new 'affordability checks' were introduced. In general, I'm a fan, as they ensure people don't push their finances too far to get a home, and end up repossessed.
Yet for a year now I've had tweets from people such as mcrhyshammer, whose cheap remortgage was rejected, because they fail affordability checks: "Circs hadn't changed. No missed payments. No debts bar new cars. £90k equity. Yet no one'd give us a mortgage." In other words, ridiculously, people are being told YOU CAN'T AFFORD A CHEAPER DEAL. Tweet me if this happened to you.
Lenders can currently waive affordability criteria on remortgages where you're not increasing the borrowing, but only a few smaller lenders do (see point 7 for how to navigate that).
I've lobbied against this already, yet soon it gets worse, the new EU 'Mortgage Credit Directive' won't allow lenders to waive affordability checks. It officially starts in March 2016, but can be brought in from September. While the EU has given us some good financial protection, this is bonkers and needs reversing. See EU remortgage rules could create mortgage prisoners.
3. Benchmark your cheapest deal at speed.
Mortgage rates are at historic lows. Yet many factors affect your cheapest deal. To help we've our...
|Deal||Rate||Fee||Annual cost during deal term (incl fee) on £150k (i)|
|Typical SVR rate (for comparison)||4.9%||N/A||£10,416|
|FIX 2yr at 65% LTV||1.18%||£1,499||£7,686|
|FIX 2yr at 85% LTV||2.14%||£1,675||£8,590|
|FIX 5yr at 60% LTV||1.99%||£1,499||£7,920|
|FIX 5yr at 85% LTV||3.19%||£1,675||£9,047|
|TRACKER 2yr at 60% LTV||1.09%||£1,995||£7,862|
|TRACKER 2yr at 85% LTV||1.75%||£995||£7,902|
|(i) Fee spread across the deal period plus the repayments, assuming 25yr term|
4. It's not just about the rate – how to factor in the fees.
The smaller your mortgage, the bigger the impact fees will have, especially for mortgages under £100,000. This can totally skew which is cheapest for you.
To assess this, spread the cost of the fees over the fixed or tracker period (as after that you may shift again to another new deal). To help, use the MSE Mortgage Total Cost Comparison within our best buys comparison, which factors in both fee and rate so you can see which really adds up.
5. How much can you save?
Now you know your rate and what's out there. Our mortgage calculators allow you to work out the potential savings...
Ultimate Mortgage Calculator
Nine tools to home in on the right answer for you, including...
Basic Mortgage Calculator | Compare Two Mortgages | Mortgage Overpay Calculator | Compare Fixed Mortgages | Ditch Your Current Fix?
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6. Two things that kibosh applications.
The days when lenders flung out deals to all and sundry are long gone. Getting accepted is now a challenge, and when possible you should start preparing months ahead.
- - Is your credit score good enough? Key tips include: a) Never withdraw cash on credit cards; b) Avoid payday loans; c) Avoid other applications, eg, credit card, contract mobile, just before applying; and d) Check your credit file for errors. This is the tip of the iceberg. See 35 Credit Boosting Tips.
- Affordability checks. As noted above, for the last year, lenders have had to stress-test whether your mortgage is affordable, even if rates were 6-7%. So you might not have been affected by it when you first got a mortgage, but now they'll want evidence of income, big bills, expenses - even eating out. So being frugal in advance helps. See affordability help.
7. Mortgage brokers can help boost acceptance.
You can, and often should, use a broker to help you find the right deal. They've info that's not available to consumers, eg, lenders' credit and affordability criteria. So a good broker can ease acceptance by matching you to the right deal - and the mortgage interview's quicker too. See Top Mortgage Brokers for full info.
Some lenders, such as Yorkshire BS, Tesco Bank and HSBC, mainly only sell mortgages direct to the public, cutting brokers out. Thus brokers are allowed to exclude them, and some do, hence why using a broker in conjunction with our mortgage comparison, which includes all these deals, is the right route.
8. Should I get a fix or tracker/discount?
With a fixed mortgage, the amount you repay is, er, fixed so it's like buying an insurance policy against possible rate rises. Variable deals move with UK interest rates (sometimes just at the provider's whim). Currently you only pay a touch more to fix.
It's very difficult to predict future interest rate moves. Even top economists are singing a different tune now from a year ago, and there's even the possibility they may fall before that. So focus on your own situation.
The more crucial the security of knowing exactly what you'll pay, the more you should edge towards fixing (& fixing longer). If cracking the rock-bottom deal's your driver, edge to short-term trackers. Fix v Variable help.
9. Got savings? They could get you a better mortgage.
At every 5% LTV threshold from 95% down to 60%, deals tend to get better, so a little savings can have a big impact on your mortgage rate. For example...
Imagine you've a £150,000 home, and want a £128,500 remortgage. That's a 85.7% LTV, so the top 5yr fix is 3.59%. Yet if you use £1,100 of savings to reduce the borrowing needed, you'd cross a threshold and be at just under 85%, where the top 5yr fix is 3.19%. This would save almost £400/year in mortgage payments alone.
See should I overpay my mortgage? for more and use the mortgage overpayment calc to see how much regular overpayments can help.
10. FREE remortgage, first-timers & buy-to-let booklets 2015.
Mortgages are a big transaction, and the best thing to do is to make sure you really know what you're doing. To help we've three totally free 40+ page printed guides, and they've all been updated for 2015.
- Remortgage booklet 2015: Download instant PDF | order printed
- First-Timers' mortgage booklet 2015: Download instant PDF | order printed
- Buy-to-Let mortgage booklet 2015: Download instant PDF | order printed