Guide to remortgaging pitfalls
In order to make sure that remortgaging is definitely worth your while, you should question why you are considering a remortgage and measure the potential savings against the costs involved, such as exit fees, valuation costs and potential administration charges.
Is remortgaging for you?
Having taken all the potential remortgaging pitfalls into account, you should be able to decide whether remortgaging represents a winning bet or whether it makes sense to stick with what you’ve got.
- Early repayment charges (ERCs) If you have an existing fixed, capped or discounted rate mortgage, or if you received a substantial amount of cashback when you took out your current mortgage, there is a real chance that an early redemption charge (ERC) or exit fee will apply to your loan. Typically, you have to pay your existing lender a number of months’ interest if you repay your homeloan before the end of the deal period. To make matters worse, some products have overhanging ERCs, which may be levied years after the fixed, capped or discounted period has run out. If you received cashback when you took out your mortgage, you will be expected to repay some, if not all, of this money if you move your mortgage elsewhere. It is important to work out the redemption costs carefully because even if you move to a new lower rate, the various fees involved may make the cost of moving mortgages actually equal more than the savings you make on the new rate. As a result, it may make sense to wait until the ERC period has passed before you switch your homeloan. If you need extra finance before your mortgage term runs out, you might want to consider a second charge mortgage.
- New mortgage penalties It may cost you next to nothing to change your mortgage if your current loan has no ERCs, but be careful when selecting a new mortgage. Choosing according to rate alone is not a good idea, as a low rate could translate into high charges elsewhere. These could be in the form of upfront costs, such as arrangement fees or exit fees applied if and when you attempt to remortgage again in the future. Of course, you might live happily ever after with your new lender and decide not to remortgage again, eliminating the need to worry about the ERC. But you never know what might happen in the future, so it’s well worth considering all possibilities now.
- Out of the frying pan: standard variable rates (SVRs) While it’s obviously important to compare the initial rate you will be offered, along with the fees, service and any other added benefits that might be on offer, you should also consider the lender’s standard variable rate (SVR). This is the rate your product will revert to once the initial deal period is over. Some mortgage products, such as discounts, are also tied to the lender’s SVR. Even if your new lender offers an attractive initial interest rate, can you be sure this will continue in the future? The lender’s SVR will provide a measure of its competitiveness – a low rate should mean that it is looking after its existing borrowers as well as new customers.
- Is remortgaging is the cheapest way to borrow money? Traditionally, a remortgage was associated with debt consolidation – the re-organisation of messy financial affairs, rather than a sensible and proactive way to make more of your money. However, plenty of people are still attracted to sorting their finances out and transferring debts with high rates of interest to a homeloan – you could find that the monthly payments for your remortgage are less than the total outgoings you pay on all your separate debts. Unsecured debt such as loans and credit cards are structured to be repaid over a much shorter period than mortgages – typically three to five years. And the high rates of interest on these products often prove an incentive to repay the debt as soon as possible. A mortgage, on the other hand, is designed to be repaid over a much longer term – typically 25 years. However, it’s worth keeping in mind that any unsecured debt you add on to your mortgage will probably be paid off over a much longer period and so you’ll end up paying more in interest in the long term. If you see no way to repay any personal loans or credit cards sooner, rather than later, a remortgage could be the way to go. But if you think you can clear your unsecured debt sooner, by cutting back on non-essential outgoings, this could be a better option. If you would like sorting out your finances and are interested in remortgaging, why not speak to an adviser?