Why Now Just Might Be the Time to Re-Mortgage
Don’t think of your mortgage as a one-off purchase, but as an ongoing process that may need careful maintenance. Many homebuyers need to re-mortgage regularly in order to keep their loan affordable – do you?
A client of ours is a mechanic with the RAC. One time he was called to a breakdown on the M4 to an old rust bucket smoking under the bonnet like freshly burnt toast. “Out of interest,” he asked, coughing through the fumes, “when was this car last serviced?”. The driver took out his phone. “I’ve no idea,” he admitted. “Let me call my grandma.”.
Sensible drivers know that if you don’t service your car regularly, then sooner or later it’s going to cost you bigtime. The same can be said of your mortgage. Although a mortgage term is usually for around 20 years, it’s better to think of taking out a mortgage as a regular process of maintenance. In most cases it’s good practice to ‘service’ your loan by re-mortgaging when the favourable terms of your deal run out – just like servicing a car. Otherwise, your lender could end up taking you for a ride.
Rule 1: Plan ahead
Never step into anything without knowing how you can get out again. In other words, whenever you take out a mortgage, you should be looking ahead to your next one. Go through the terms of any mortgage deal you’re offered with a fine tooth comb (or get a mortgage adviser to do it for you). Look especially for early repayment fees (also known as the redemption penalty). These may apply beyond the terms of your mortgage deal, forcing you to spend one or more years on your lender’s standard variable rate (SVR), which could be very costly.
Reasons to re-mortgage
Assuming you’ve made sure you can leave your current mortgage without paying a huge penalty, why would you want to? Here are the top reasons:
- Interest rates right now are amongst the lowest on record. There are some amazing deals (both fixed and variable rates) that could save you hundreds of pounds a month.
- Your current deal is about to expire, which would push you onto the lender’s Standard Variable Rate (SVR) which can be much higher than you can get elsewhere.
- You want to switch to a different kind of mortgage, such as a fixed, capped or tracker.
- You need a more flexible mortgage, such as one that can let you miss payments or make excess payments (useful if your income fluctuates).
- Your home has risen significantly in value (so you could get a better mortgage deal).
- You want to borrow money against your property (but see below).
And some reasons not to
Re-mortgaging isn’t always the best option – and it certainly shouldn’t be approached lightly. Here are the times when you should think twice before acting:
- Your outstanding loan is small (e.g. £50,000 or below) – the switching fees are likely to wipe out any potential savings.
- You can borrow money more cheaply elsewhere. Although it’s possible to borrow money against your property, it’s rarely the best solution. Consider: if you add £5,000 to a 25-year mortgage at 3%, you’d pay as much in extra interest as if you’d borrowed that £5,000 over 5 years at a whopping 15%. You can definitely find a better finance deal than that.
- Your current mortgage has a large early repayment fee. If you didn’t plan ahead and are saddled with a big redemption charge, then it may cost you more to move. However, your current lender may let to change to another of its own deals at a reduced charge. Check to see if they offer anything better and see if it’s worth moving.
- You have a high loan-to-value ratio. If your equity percentage is low (say, if you’re on a 90% mortgage) then you’ll struggle to get a better deal elsewhere.
- Your circumstances have changed. Were you offered your current mortgage based on you and your partner having two steadier, higher paid jobs than you have now? If so, then consider sticking with what you’ve got – you probably won’t be offered a deal this good in your current situation.
How to re-mortgage
Your best option is always to talk to an independent mortgage adviser or a financial planner who specialises in mortgages like ourselves. They can assess your current deal, take your circumstances into account and find you the best deal from the whole of the market – potentially saving you thousands of pounds over the mortgage term. They can also alert you to any lock-ins or unfavourable aspects of the deal, so you don’t get caught out further down the line.
If you haven’t taken a good look at your mortgage for several years, now is probably the time to do so. Get an expert to take a look and help work out if there’s something better out there. If not, your mortgage might just turn out to be a bit of an old rust bucket that won’t get you where you need to go.
Please get in touch with us if you would like to chat about your existing mortgage and the options available to re-mortgage and find a better deal.
This article is adapted from one that first appeared on Unbiased.