How to cut down your mortgage costs
A STEP BY STEP GUIDE TO REMORTGAGING
How to reduce the cost of your mortgage.
Firstly, just what is a remortgage? Well, a mortgage is a loan used to buy a property and if you already have a mortgage and you replace your original mortgage with a different mortgage or mortgage provider then that is called remortgaging. You are simply replacing one loan with another loan.
People remortgage for a variety of reasons; to save money and to consolidate debt being the most common reasons. You could also remortgage because your circumstances have altered and you feel a different type of mortgage would be more appropriate to your needs. Say changing a repayment mortgage for a flexible mortgage if your income fluctuates throughout the year.
Different types of mortgage.
There are different types of mortgages depending on your circumstances.
The most common is a repayment mortgage, where you pay off the capital borrowed over a set period of time, usually 25 years. At the end of this period you will have paid off the amount borrowed and the interest.
Interest only mortgages used to be popular. In this type of mortgage you only pay the interest over the life of the mortgage, the capital – the amount borrowed – is normally repaid in full at the end of the mortgage period by linking the mortgage to an endowment policy, pension payout or similar lump sum payment. This type of mortgage has fallen out of favour since 2008.
Many mortgage providers initially offer special deals to attract potential borrowers. These deals may include:
Fixed rate mortgages, where the rate stays constant over the period of the deal.
Discounted mortgages where the mortgage rate is discounted against the lenders Standard Variable Rate, for the life of the offer.
Tracker rate mortgages, where the rate is set at the Bank of England base rate plus a set percent, say base rate plus 2%.
With a capped mortgage the rate you pay is capped against say the tracker rate or Standard Variable Rate for a mortgage and cannot rise above the capped rate.
Finally, a flexible mortgage allows you to pay off your mortgage more quickly by increasing the amount you pay. You can also withdraw some of the money you have previously paid in if you require more cash at certain times. A good mortgage if your work is seasonal or you are self-employed.
All these types of mortgage deals have advantages and disadvantages.
Remember, regardless of the type of mortgage; in general OPT FOR THE CHEAPEST PROVIDER OVER THE LIFETIME OF THE MORTGAGE OR DEAL.
Getting the best deal.
In calculating the best provider you need to take into account any redemption penalties or other restrictions or conditions that the new provider may impose.
The best remortgaging deals will go to those with the best credit scores.
When you borrow money the lenders need to assess your ability to repay your loan. They do this by credit scoring your application. The credit score is unique to the lender; there is no universal credit score or blacklist. Each lender has their own criteria for accepting your loan request or rejecting your loan application. However, all lenders will check your credit history over the last 6 years, and the best deals will go to those who have regularly and consistently paid their bills on time and in full. Multiple applications for credit, multiple credit checks, being self-employed, even not appearing on the electoral register will reduce your chances of obtaining a loan.
Since each lender assesses your credit score differently you may be offered credit with one provider but not another. You may obtain a credit card but struggle to obtain finance for a motor vehicle. One thing is absolutely certain, the worse your credit rating the more you will have to pay for finance. Just like a good reputation, your credit score takes years to establish and is easily lost.
To find out your current credit score just send off to Experian for a free credit score report. You can obtain a full report for £2, but I have always found the free report adequate. They also offer advice on improving your credit rating. I use Clearscore to check my current credit rating – see www.clearscore.com.
Send off for a report, check that it is accurate and if not get any inaccuracy put right. If you are not on the electoral list sign up. Always endeavor to pay your bills on time and in full, and if there are periods where your payment history was adverse inform your potential lender and your credit score organization. If the situation was temporary but is now resolved it may just tip the balance in your favour. Close any unused accounts you may have and space out or reduce the number of credit applications you make so you don’t leave an adverse credit application footprint behind you. Check your credit report and credit accounts regularly and report any concerns that you find. In short make sure your credit score is accurate.
There is no short term fix for an adverse credit score. If you can make sure you pay your bills on time and in full. It can help to obtain a credit card designed for people with adverse credit scores, such as a Capital One card. Use the card sparingly and ALWAYS pay the balance on time and in full. Aim to improve your Experian credit rating score to 880 or above and remember your credit score is just one of the factors your potential lender will take into account when they assess your creditworthiness. How long you have been at your current address, number of previous jobs and length of time in employment, other debts and your repayment history with your potential loan provider can make a significant impact on your ability to obtain credit. If you already have a savings account or ISA with a potential mortgage provider you may well be looked on more favourable for a loan.
Loan to value ratio.
100 % loans are now a thing of the past, but the higher the ratio of the value of your loan is to the value of your property the more competitive will be your mortgage rate. If you originally took out a 100% loan for say £100000, which gives you a Loan To Value (LTV) ratio of 1, and your property has risen in value, say to £140000 and your outstanding mortgage is now £80000 your current LTV will be 0.57 (£80000 divided by £140000). If you apply for a £80000 mortgage the lower LTV should result in a more competitive mortgage rate.
You can estimate the current value of your property by logging on to Zoopla.co.uk/home-values. Moneysavingexpert.com also as a tool to help you estimate the current value of your property. Look for it under Mortgages.
OK, so now you have a good idea of your credit score and the Loan to Value ratio of your property.
How to re-mortgage.
Most people think remortgaging is a long and difficult process, but it is not.
Although remortgaging takes around 4 to 6 weeks most of that time is taken up by the application process of your mortgage provider, inspections of your property and other administration tasks that are entirely out of your hands. It helps if you fill in the necessary forms correctly and swiftly. The help of a mortgage broker will speed up the process.
Right, let us begin.
Step 1. Write down your existing monthly mortgage payment and times by 12 to give you your annual mortgage cost.
Does that sound difficult? How long will step 1 take? About 2 minutes, max.
Step 2. Contact your current mortgage provider and ask them for:
- A redemption quote.
- Any redemption, exit or early repayment charges.
- Any other administration fees or charges associated with terminating the mortgage.
- Any other costs associated with terminating your current loan.
It is worth discussing your requirements with your current provider. They may well offer you an excellent deal on an alternative mortgage, especially if you have a good payment record with them, and the remortgaging process may be quicker and simpler. Your current provider may discount certain fees or charges, such as exit fees. It is important to be honest and upfront with your mortgage provider as mistruths often surface when terminating a mortgage and the result can be unexpected and unwelcome charges.
You also need to contact an estate agent, financial adviser or solicitor to establish the cost of the set up fees for your remortgage.
Set up fees consist of:
- Arrangement fees.
- Legal fees.
- Valuation costs.
- Brokerage fees.
- Stamp duty.
- Any other fees associated with obtaining a new mortgage, such as appraisal and loan application fees, land survey and deed searches.
You need a good idea of the total cost of remortgaging.
Step 3. Consult an Independent Financial Adviser or Mortgage Broker. Find one using www.unbiased.co.uk. Alternatively you can compare mortgages using a mortgage comparison website such as www.finder.com/uk/mortgages, www.mortgagefinder.co.uk, https://moneyfacts.co.uk/mortgages/mortgage-calculator and https://moneycompare.which.co.uk/mortgages.
You now have a good idea of the costs involved in changing your mortgage provider. The next step is to establish the type of mortgage best suited to your needs.
There are many types of mortgages, special offers and deals. You need to decide which type of mortgage is best for your current circumstances.
If you have some flexibility in your finances and can weather a rise in interest rates, opt for a repayment mortgage.
If you cannot take the risk of interest rates rising go for a fixed rate mortgage.
If your income is variable then a flexible mortgage may be your best option.
You should always check out special offers or deals, such as capped, tracker and fixed rate deals. Remember most deals are for a limited time period and they may not be the cheapest options.
Check if the adviser charges a fee or commission and factor these costs into your remortgaging costs. Only deal with a ‘whole of market’ adviser. Your adviser should only charge you a fee or commission on completion of your mortgage. No mortgage, no fee! Shop around for a good adviser, never use the one recommended by an estate agent or loan provider without checking out and speaking to several alternative advisers.
Discuss your requirements with your adviser. They have intimate and up to date knowledge of the market. Never try to go it alone. Money spent obtaining good advice is never money wasted – remember if you decide not to remortgage you have only wasted a little of your time. The golden rule is no mortgage, no cost.
Step 4. Compare and contrast your current mortgage with your new mortgage options.
Let us suppose that your current mortgage is £250000.
Your current outstanding mortgage is £187500, which gives you a LTV rate of 75%.
You opt for a 2-year fixed rate tracker mortgage with the West Bromwich Building Society.
The initial rate is 1.99%, rising to 3.99% after 2 years.
The fees associated with remortgaging are £1737, of which £935 can be added to your new mortgage.
The cost of your new mortgage is £793.81 a month for the first 2 years, increasing to £974.30 a month thereafter.
Your current mortgage is with the Lloydstsb.
You have a 25 year £250000 repayment mortgage at 3.99%.
This costs you £1315 per month.
Your new deal is for 2 years, so you need to calculate how much your present mortgage will cost you over the next 2 years.
£1315 x 24 months = £31560.
Now calculate the costs of your new mortgage.
£793.81 x 24 months = £19051.
Plus your remortgaging costs, which gives £19051 + £1737 = £20788.
Cost of your current mortgage over 2 years = £31560.
Minus cost of your new mortgage over 2 years = £20788.
Savings over 2 years = £10772.
You have reduced your monthly mortgage from £1315 a month to £793.81 a month, (£866.17 if you take account of your remortgaging costs). You have saved yourself £449 a month.
Even if you decide not to remortgage after the 2-year special deal, your mortgage will rise to £974.30 a month. You are still better off by £340.70 a month.
So do you believe that remortgaging is difficult and time-consuming?
- You just need to calculate the annual cost of your current mortgage.
- Contact your current mortgage provider and get a redemption figure for the balance outstanding on your mortgage, plus a breakdown of the cost incurred by terminating your current mortgage. Make sure you are provided with a complete breakdown of all costs.
- Contact a financial adviser or mortgage broker offering ‘whole of market’ services and establish the best mortgage for your needs at the most competitive rate. Establish the costs involved in obtaining a different mortgage – your financial adviser will do this for you.
- Do the sums and work out your savings over the period of any special deals offered by the new mortgage provider. Only remortgage if the savings are substantial. Remember no mortgage, no fee.
Allow 2 months to remortgage.
Never terminate your current mortgage until you have established the exit fees. It is often better to wait until the end of any special deals before taking out an alternative mortgage. If you are remortgaging to save money you must remortgage when your current deal ends. It is quite possible to remortgage every two to three years providing you have sufficient equity in your property. Over the course of time your LTV should increase and the amount required for a mortgage should decrease. Many people are tempted to use the equity in their homes to raise cash. I prefer to reduce my mortgage, increase my LTV and save money.
As with all forms of finance the better your credit rating the more competitive will be your loan rate. It is a fact of life that the best deals go to those who need them the least. A young family with an adverse credit record will struggle to obtain a decent remortgage deal, in fact they may be unable to remortgage at all. However, if you have maintained a decent payment record with your current mortgage provider and the value of your property has risen over the last few years talk to your mortgage provider and see if they are willing to offer you a better deal. You may be pleasantly surprised.
Only deal with reputable mortgage providers and brokers. There are plenty of sharks out there. Your local Citizens Advice Bureau may be able to recommend a good adviser – they are worth their weight in gold. Never reply to advertisements in local papers or on TV. Go to a long established independent local adviser, if possible one that has been personally recommended to you. You need to maintain a good credit record for at least three years before a mortgage provider will consider you for a competitive remortgage. There are still a few institutions willing to consider people with an adverse credit history, your financial adviser will be able to advise you.
I can recommend two good websites and one newspaper article that will help you in your quest for a remortgage:
Try to reduce your expenditure. Use the money saved to pay off your debts – the highest interest first. Maintain a good credit record for a minimum of three years, if not for life, and you will find you will increasingly be eligible to apply for the best and most advantageous credit deals.
Never forget, money attracts money. The more intelligently you budget, the more wisely you save, the more money you will have to invest in making more money. A fool with money in his pocket wastes it. The wise invest their surplus cash in obtaining assets that make them even more money. That is the simple secret of wealth.
If you have any comments, suggestions or wish to share your experiences please feel free to post your comments to this site.