Remortgaging to a new deal can be a great money-saving move. But there are a few things you need to check before you switch it up if you want to save.
When you come to the end of the initial fixed interest rate term on your mortgage, you move onto your lender’s standard variable rate (SVR). This is usually more expensive than the best new fixed or tracker deals on the market.
In fact, research from online broker Trussle found that the two million borrowers who are currently on their lender’s SVR could save as much as £408 a month by switching to a new deal.
But before you dive in, it's important to make sure remortgaging is the right option for you, and that you're getting a good deal if you do go ahead. Here are 5 things to think about before you commit.
1. Check what fees you’ll need to pay to leave your current deal
Before you even think about finding a new mortgage deal, you need to carefully consider what fees you’ll have to pay to your existing lender to leave your current deal. It may be that you won't actually save by remortgaging, because the fees outweigh any potential savings.
If you are in the initial fixed or tracker period for your mortgage, then you may need to pay an early repayment charge (ERC). This is generally worked out as a percentage of your outstanding balance and it can be pretty hefty. For example, if you're trying to leave a five-year fixed rate in the first year, then an ERC of 5% is common.
If you have finished that initial period and moved onto your lender’s SVR, then you probably won’t need to pay an ERC. But you may have to pay an exit fee (also called an admin fee). This will set you back anything up to a couple of hundred pounds, though thankfully not all lenders charge this fee.
2. Look beyond the first rate you see
The first thing most people look at when comparing mortgages is the interest rate. That’s because it has a direct impact on the size of your monthly mortgage repayments - the bigger the rate, the bigger your repayments will be.
That's a great place to start, but you also need to consider your loan-to-value (LTV) and how this will affect the rate you'll actually be able to get. Your LTV is how the size of the loan you’re looking for compares to the overall value of the property. The more of the mortgage you've paid off, the lower your loan-to-value rate will be.
Ideally, when you come to remortgage you'll be looking at a smaller LTV than when you first bought the property, thanks to your monthly repayments reducing the size of your loan. If your property has gone up in value as well, then the LTV will be further reduced. This is important as the lower the LTV, the better the interest rates that will be on offer from mortgage lenders.
But if your LTV has stayed at a similar level, then you might find that the deals on offer to you won't give you huge savings. Many lenders have repayment calculators on their websites which can help you work out how your repayments would change if you remortgaged to one of their deals. Alternatively, you could use a calculator like this one on the BBC website.
3. Don’t ignore the new lender fees
If you're changing mortgages there may be some fees to pay. It's worth taking the time to work out how much you'll have to pay in fees if you switch deals, as depending on your situation it could add up to quite a lot. Here's a couple to watch out for:
Most mortgages now charge an arrangement fee (though just to keep you on your toes, lenders like to give this different names, such as a 'product fee'). These can vary massively in price - while some will be fee-free, others will charge as much as £1,500.
You can pay this fee in one go at the outset, or you can add it to your mortgage balance. Bear in mind though that if you do, you will be charged interest on it, so it'll cost you much more over the long term.
There may also be a booking or reservation fee, which is essentially a charge for reserving the deal while your application is processed. This is much smaller, often around £100, but it's not refundable. So if you don’t end up taking out the mortgage, that money is gone for good. Not all lenders charge this fee though, so check first.
4. Check whether legals and valuations are included for free
When you remortgage, your property will need to be valued. A surveyor will be sent out to have a look around and determine exactly how much your house is worth. Thankfully most lenders will cover the cost of this valuation for you on a remortgage, though if they don’t, you can expect to pay a few hundred pounds.
Similarly, there's legal work to be done on a remortgage too. Again, most lenders will include this as part of their remortgage package, though if they don’t it could cost up to £300.
5. If in doubt, use a mortgage broker
You’ll need to include these fees when working out the best deal to go for - it may be that it works out cheaper to go for a product with a higher rate but smaller fees.
It can be a smart move to use a mortgage broker when looking for a new deal. Not only do they have access to some products that you can’t get directly, they’ll also have a better idea of precisely which lenders are most likely to be happy lending to you. Bear in mind that some brokers will charge a fee for their advice too, so that’s another cost to take into account.