The mortgage market looks like an inviting place at the moment. Rates are at their lowest point for more than five years – and around half what they were at the peak of the financial crisis. If you’re sitting on a mortgage you’ve had for a while, you might be tempted to dive in and see if you can get a better deal. However, there are five questions you need to ask yourself before you make a move.
1. What do you want to achieve?
Usually people remortgage for one of two reasons: to free up equity in their home, or to lower their monthly payments. In some circumstances it’s possible to achieve both, but in the vast majority of cases you need to be clear about your priority.
Remortgaging to free up equity is popular among people who have owned their home for some time, and need a lump sum. In the years they have owned the property, price rises and repayments will mean they own a bigger percentage of their home than when they first bought it. If they need money for home improvements or life events, then they may want to tap into some of that equity.
Remortgaging to a cheaper deal often makes sense if you are on your lender’s standard variable rate. These rates tend to be higher than fixed or variable deals, so you can cut your outgoings significantly by remortgaging.
2. What can you afford to repay
If you are remortgaging to reduce your monthly costs, then affordability issues should get easier rather than harder. However, if you are freeing up equity, then you need to consider it carefully.
It’s important to go through your household budget and think clearly about all the money you have coming in each month, and the total that you spend. That way you can get an idea of what you have left to pay the mortgage with.
You’ll also need to factor in the other costs of the mortgage – including any fees – and if you’re getting a variable rate mortgage, you’ll need to consider what will happen when interest rates go up. It’s only a matter of time before rates rise, so you need to calculate your monthly costs with a modest rise – and with a more significant one – to establish how you will rejig your monthly budget to make room for the extra expense.
3. What kind of deal do you want?
The big question tends to be whether or not you want to fix your rate. There’s no right or wrong answer when it comes to fixing: it depends what suits you best. If you want to pay as low a rate as possible at the moment, then you might prefer a variable rate. However, if you go down that route, you need to think carefully about how you will keep up repayments when interest rates rise, and your monthly costs increase.
It’s notoriously difficult to predict when rates will rise, and how much they will go up by, but it’s best to assume that rates will increase at some point, and you need to make plans for when it happens.
Variable rates come in a couple of guises. There are tracker rates, which will track interest rates for the life of the mortgage. Then there are discount rates, which also track rates, but will offer a discount for a while.
If you need certainty about your monthly repayments for a reasonable period of time, and are happy to pay a premium for that security, then a fixed rate may suit you better. You will pay more each month at the outset, but when rates rise, your payments will be fixed, so they won’t be affected.
If you’re opting for a fix, you also need to consider whether or not you plan to move during the life of the mortgage. A large number of these deals are portable, so you can take them with you when you move. However, your lender will have to assess whether your existing mortgage is appropriate for your new home, and if it decides that it’s not, you may face early repayment charges.
At the moment, almost nine out of ten new mortgages are for fixed rate deals, but that doesn’t mean this approach is right for you: you need to work out the potential costs, and consider your own circumstances, before making a choice.
Aside from the decision between fixed and variable rates, there are a number of other potential features. Some mortgages are capped, so they will rise and fall with interest rates, but once they reach a particular level they cannot rise any further. There are also drop lock mortgages, which are variable, but allow you to switch into a fixed rate in the early years of the mortgage, without having to pay any additional fees.
All of these types of mortgage can have a number of additional features. They may be flexible – allowing you to overpay, underpay or take a payment holiday. They may also be a current account mortgage – so that you have a current account alongside your mortgage, and any money in your current account is offset against the mortgage when your interest is calculated. Finally, you can get offset mortgages, which are similar to current account mortgages, but also include a savings account, so your savings are offset against the balance of the mortgage too.
4. How long do you want to fix for?
If you opt for a fixed deal, you will have a number of choices about the length of time you want the mortgage to last for. The most popular periods are two and five years – although there are plenty of other options.
As a general rule, the fees on two-year deals will be lower than on a five year deal, and the rate you pay will be lower too. The downside is that your repayments are only fixed for two years, and after that time you will need to go back out to the market and search for another mortgage. If interest rates have risen in the interim, you could end up paying more each month.
5. How much will it cost in total?
Whenever you remortgage, you shouldn’t just consider the interest rate: you need to factor in the total cost of the deal. There are a range of additional fees for setting up a new mortgage. The most significant is the arrangement fee, which tends to be around £1,000 – although it can reach £2,000.
There are also booking fees, valuation fees, legal fees, and sometimes a higher lending charge if you have a small deposit. If you choose to take advice, you may also have to pay for that. Finally, it’s worth checking the fees at the end of the mortgage. There may be an early repayment charge if you leave the deal early, but even if you stay for the life of the mortgage, there may be an exit fee.
When you compare mortgages, you need to add all the applicable fees into your total repayments – to make sure you are comparing the mortgages fairly. Typically, the longer you choose to fix your mortgage for, the higher the fees you have to pay, so it’s worth taking the time to understand the full price you are paying for the security of a long term fix.