The re-mortgage market in the UK is big business for most lenders. Mortgage lenders have become increasingly aggressive with their marketing tactics over recent years as they try to hold onto or increase their market share at the expense of their competitors. In some ways this has worked to the advantage of the consumer but it also means that most lenders will now offer more attractive deals to new borrowers than they will offer to their existing customers.
Before the early 80’s most people arranged their mortgage with one lender and then stuck with that mortgage throughout its life. Mortgages were generally provided by Building Societies and the borrower was expected to go cap in hand to their Building Society who would lend if a savings account had been held for a sufficient period of time and if the lender had not used up their quota of funds for that period. In other words the lender had the ‘upper hand’ and the borrower was at their mercy. This all started to change in the mid eighties as the role of the Buildings Societies became less restricted and a new Building Societies Act took effect which allowed the Building Societies to compete head to head with Banks and Insurance Companies in all areas of financial services. As the Banks and Insurance Companies saw their territory being invaded by this new breed of Building Society so they too fought back and started encroaching on the Building Societies territory, most significantly, by entering the mortgage market. In addition Building Societies were released from the constraints that they had been under with regard to raising funds and were now allowed to raise money on the Wholesale Money Markets. All of these changes combined to make one very big difference to the market – there was now no shortage of mortgage money for the financial institutions to lend and a big fight was on to attract the customer. As with any product greater competition is generally good for the buyer resulting in lower prices.
So, let’s now look at the situation in today’s market. There are currently a little over 100 different mortgage lenders active in the UK market today. These range from the traditional Building Societies to Banks, Insurance Companies and the centralised lenders. As long as the applicant is credit worthy and the property to be mortgaged is good security there is no shortage of potential lenders. As I mentioned earlier, each of these lenders is anxious to maintain or increase their market share and this has resulted in an ever increasing array of new, innovative and competitive products being marketed. Unfortunately, in all of this most lenders seem to have forgotten their existing customer base and most of their marketing activities are directed towards attracting new borrowers rather than looking after their existing customers. The result of this has been to create a two-tier market. Most lenders will offer one set of products to new borrowers and another, less attractive, range of products to their existing customers (this is a generalisation and there are a few lenders who will offer existing customers access to the same products as new customers).
What this means to you, the borrower, is that in order to obtain the most competitive mortgage rates you need to review your mortgage arrangements every few years and look at what the competition is offering in comparison with your existing lender. There are still a very large number of people who do not do this and in effect they are subsidising the low interest rates on offer to new borrowers. If you are one of the large number of people who are paying the standard variable mortgage rate then you should be asking yourself ‘why?’
There are some circumstances where a re-mortgage is not a viable option and before you go down this route you should consider the sums carefully and make sure that a change of lender is a financially sound proposition. To make this decision you will need to look at all the costs involved in arranging the re-mortgage and then calculate how much you are likely to save by taking this route. If there is a significant saving to be made then you should seriously consider changing mortgage lender. However, before you rush down this route talk again to your existing lender and tell them what you are proposing to do. You may find that they become more co-operative if they think you are serious about leaving them and offer you a deal which you will be happy to accept.
In general terms if you fall into the following categories you can almost certainly make significant savings by moving your mortgage;
You are paying the standard variable rate to your existing lender.
. You are free to redeem your existing mortgage without penalty.
You have more than 5 years left to run on your existing mortgage.
You owe less than 90% of the property value.
You have an outstanding debt in excess of £40,000.
You are not considering moving and taking a larger mortgage within the next few years.
This is a general guideline and even if you do not fit all of the categories it may still be worth considering a move. For example if you only owe £30,000 you may find that the fees associated with arranging the re-mortgage out-weigh any saving to be made. However, there are some lenders who will offer to pay all the re-mortgaging costs and if a deal like that can be found then you could still make a substantial saving.
The first thing that you need to do is to write down your existing monthly mortgage payment. Remember that the monthly payment you make to the lender may include a buildings or contents insurance premium and you need to deduct that amount if this is the case.
The second step is to look for the mortgage product that best meets your needs. If you have decided that you would like a discounted rate then decide how long you would like the discount spread over. The next step is to obtain some quotations from various lenders and write down the new mortgage repayments. You now need to deduct the new payment from your existing monthly repayment to see how much you will save each month. The next step is to look at the period of the discount and this will tell you how many months the saving will apply for. Multiply the monthly saving by the number of months of the discount and this will give you your gross saving over the period.
You now know how much you can save by moving your mortgage but you also need to take into account the fees and charges associated with arranging the re-mortgage. Obviously, if these are greater than the saving to be made then you will need to think again. The following list will give you an idea of the fees to look for although not all of these will necessarily apply in your circumstances;
Lenders Arrangement Fee
Mortgage Indemnity Premium
Redemption Penalty on existing mortgage
Land Registry Fees
Local Authority Search Fee
Charge from existing lender to provide a reference to the new lender
If you talk to the lender you are interested in moving your mortgage to they should be able to help you calculate these fees and they will tell you which ones will apply in your case. Alternatively if you are using a broker to arrange the mortgage for you ask him to give you a full quotation outlining all these costs. In addition, if you are obtaining quotations for legal fees make sure that the quotes you are receiving include all the costs such as Land Registry Fees and Local Authority Search Fees and not just the solicitors own charges.
Once you have calculated these charges you are then in a position to take the costs away from the savings so that you can see what the net benefit is. There are, of course, other reasons over and above the simple cost saving why you might want to re-mortgage. You may wish to take advantage of a fixed rate or raise some extra capital in which case a cashback mortgage might suit you.
If you find that the costs associated with re-mortgaging are out-weighing the benefit, and this is likely to be the case if you have only a small mortgage, then you should look out for re-mortgage packages which cover some or all of the fees or offer a cashback on completion which can then be used to offset these costs. For example, there are several lenders who will refund the valuation and arrangement fees on completion and even pay the legal fees or offer a cashback. These products look particularly attractive with the smaller mortgages as the savings that can be made on the interest rate, in cash terms, are obviously smaller the lower the mortgage debt.
The following table will hopefully help you to calculate the saving the saving to be made;
|i)Existing Mortgage Payment||£|
|ii)LESS: New Monthly Mortgage Payment||£|
|Total Monthly Saving (i-ii)||£|
|X Number of Months discounted/fixed rate||x..months|
|= Total saving over period of discount (A)||£|
|1) Lenders Arrangement Fee||£|
|2) Valuation Fee||£|
|3) Mortgage Indemnity Premium||£|
|4) Brokers Fee||£|
|5) Redemption penalty on existing mortgage||£|
|6) Legal Fees||£|
|7) Land Registry Fee||£|
|8) Local authority Search Fee||£|
|9) Reference charge from existing lender||£|
|TOTAL COSTS (B) (1+2+3+4+5+6+7+8+9)||£|
|PLUS: CASHBACK/VALUATION FEES/LEGAL FEES REFUNDED (C)||£|
|TOTAL SAVING OVER PERIOD (A-B+C)||£|
In broad terms, the more attractive the interest rate on offer, the more likely there are to be other conditions to watch for. These other conditions will usually fall into the following categories;
1. Early redemption penalties
– This is the way in which lenders will ensure that you stay with them for a pre-determined amount of time. The penalties are usually calculated at a level that will take away any benefit received if the mortgage is moved. It is becoming increasingly common for lenders to impose these penalties for several years after the initial benefit has been gained. This means that in most cases you will be required to pay the lenders normal variable rate for a period of time after the fixed or discounted period has ended. There are however, still some products that will allow you to repay the mortgage without penalty and these are worth looking at although you will usually find that they do not offer the most competitive interest rates.
2. Conditional Insurances
– Some lenders will require you to take out their own buildings, contents or accident sickness and redundancy insurance. You may find that one, or all, of these products are required by the lender and this is a cost that you will need to take into account when assessing the product. If buildings and contents insurance is compulsory you should ask the lender to tell you how much this will cost. Compare their quotation with others you can obtain elsewhere and if the lenders insurance is more expensive, treat the difference as an additional cost when reviewing your figures.
3. Arrangement Fees
– Lenders arrangement fees will vary from a few hundred pounds up to 1% of the mortgage so make sure you are aware at the outset how much you will be charged.
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