Residential – remortgage

When you take out most, if not all, mortgages you will be given a rate that will remain in place until some fixed date in the future. Common mortgage deals include trackers, fixed rates and discounted rates. Each of these is explained below. Lenders offer you these rates for a defined period after which the mortgage reverts to the standard variable rate (SVR) which is often higher.

Fixed Rate

The interest rate remains the same throughout the period of the deal – typically one to five years, though it is possible to get ten year fixed rates. If you opt for a fixed-rate, you’ll have the security of knowing exactly how much your mortgage will cost you for a set period of time.

The advantage of this is that your mortgage payments will remain the same, even if interest rates changed for as long as you are in the fixed rate period. This makes it great for budgeting.

However, you are tied in for the length of the deal, so if interest rates fall you can’t take advantage of them. For example, if you opt for a five year fixed-rate deal, you will be tied in until the fixed term ends. If you want to get out of the mortgage before then, you’ll be charged a hefty penalty – often thousands of pounds.

So before you apply for a fixed rate mortgage, think about how long you are happy to be locked in for. Also, you need to be prepared for possible changes in the mortgage market at the end of your fixed rate period as the rates available at that time may be lower or higher and you may have to be prepared for an increase in your monthly payments.

Trackers

The interest rate on a tracker mortgage is linked to the Bank of England base rate. So if the base rate changes, your mortgage rate will change.

If the Bank of England base rate is 0.50%, and you took a tracker mortgage with a rate that is 2% above the base rate you’ll be paying an interest rate of 2.50% . If the Bank of England put the base rate up to 1%, your mortgage rate would increase to 3.00%. This would add about £25 a month to the repayments on a £100,000 mortgage.

The rates on the leading tracker mortgages tend to be lower than on fixed rate deals although this isn’t always the case.

Although trackers are variable rate mortgages, it’s easy to understand what rate you’ll be paying because they are directly linked to the base rate. Therefore, the rate, and your monthly payments, will only change if the Bank of England changes the base rate and this is reported in most of the daily newspapers.

However, you don’t have the same security with a tracker that you get with a fixed rate mortgage because the rate is variable. This means you have to be prepared for the fact that your monthly repayments could go up – and it’s really important to make sure you’ll be able to still afford your mortgage if this happens. If money is tight and you need to budget carefully, a fixed rate mortgage will probably be a better option.

As for fixed rate mortgages the rates at the end of the tracker period may be higher or lower than the rate you had been paying so it is possible that you will have to be prepared for an increase in your monthly payments.

Discounted Mortgages

Trackers aren’t the only type of variable mortgage. Discounts are another. However, unlike trackers the interest rate isn’t linked to the Bank of England base rate. Instead, it’s linked to the lender’s standard variable rate (SVR) and this is a significant difference because lenders can change their SVR even if there has been no change in the base rate.

A number of lenders have done this over the past year or so, and have increased their SVRs. This means their customers with discount mortgages have seen their repayments go up even though the Bank of England base rate hasn’t changed since March 2009.
Discount mortgages are available over different terms – typically one to five years – and as with trackers and fixed rate deals you will probably be charged a penalty if you want to get out of the deal during the term.

As with tracker mortgages, the rates tend to be lower than those on fixed rate mortgages. And because discounts are variable, the rate could fall as well as rise. If the rate were to fall, your monthly mortgage payment would reduce.

The way discount mortgages are priced isn’t as transparent as tracker mortgages. Because the rate is linked to the SVR, not the base rate, the lender can theoretically change the rate at any time. So you may find your monthly mortgage payments rises when you’re not expecting it.

Before you take a discount mortgage out, make sure you’d still be able to afford your repayments if the rate was to go up. If it would be a struggle, opting for the security of a fixed rate would be a better option.

There is another type of mortgage that can incorporate the above types but where you can also link the mortgage to a current account in order to OFFSET the interest that would be gained on savings against the interest being paid on the mortgage. These are called, unsurprisingly, Offset Mortgages.

Offset Mortgages

Rather than earning interest on your savings, that money is set against your mortgage so you pay less interest on that debt.  For example, say you have a £100,000 mortgage and £20,000 in savings, you would only be charged interest on £80,000 of the mortgage. However, your monthly mortgage repayments will have been calculated as if the debt was £100,000. This means you end up paying more than you need off your mortgage each month. As a result you clear your mortgage off more quickly and save yourself thousands of pounds in interest.

Some lenders give the option of reducing the monthly payments so that they are calculated on the mortgage amount once your savings are factored in. So with the example above, your repayments would be based on a £80,000 mortgage.  This can be good if you want to save money now, but it won’t help if you are considering an offset to pay your mortgage off more quickly.

If you are considering an offset, you will have the choice of fixed or variable rate products, so consider the advantages and disadvantages of those as discussed above. Also, some offset providers will let you link your current account to your mortgage as well as your savings.

As well as enabling you to knock years off your mortgage and save you thousands of pounds in interest, offset mortgages also offer a significant tax benefit.

Ordinarily, you pay income tax on any interest you earn on your savings. However, if you offset, you have an offset where you don’t earn interest on your savings so there is no tax to pay. An offset can therefore be particularly attractive for people in the higher or top rate tax brackets.

However it is worth noting that the rates on offset mortgages tend to be higher than those on standard mortgage products so if you only have a small amount in savings, you may be better off just taking a normal mortgage and finding the most competitive savings rate you can.

Why remortgage?

The prime reason for remortgaging is to ensure that you always benefit from having the best mortgage and rate for your circumstances and that you minimise the overall cost of your mortgage. There are often lenders incentives given to mortgage holders such as free valuation and free legal conveyancing in order to secure your business. We like to contact our clients approximately 2 months before the end of the current deal ends and look for the best replacement mortgage we can find.

We need, as for any mortgage application, to use your income and expenditure details along with knowledge of your credit record to find the best lender who will be willing to provide you with the funds you require. It is at this stage that you can either pay off some off the mortgage (if you are fortunate enough to be have savings) as early repayment charges cease at the end of your current mortgage deal or, conversely, you can borrow more if you need in order to, say, pay for home improvements or for many other valid reasons (except for business purposes).

Often capital is raised at remortgage time to gift children with, say, a deposit for a new home.

Remember that the amount you can borrow is based on each lenders view of what they believe you can afford so it’s important that we test this using their online calculators before we make any application.

Our aim is to start a new mortgage deal on the day that the old one finishes in order to make sure you don’t pay more per month at any time than you need to.

The process is normally quite straightforward so if you’re interested and your deal is soon to end then you need to speak to us as soon as possible.