- Buying abroad: Q&A with Amanda Lamb
Homeowners with fixed rate mortgages should get organised well before their rate ends - or potentially find themselves paying hundreds of pounds more than they need to, recent customer experiences show.
Many banks or building societies only contact customers at the last minute, if at all, to remind them that their rate is up.
London based magazine editor Martyn Collins recently found this out to his cost. He received a letter from Cheltenham and Gloucester reminding him that his deal was up only three weeks before the mortgage rate was due to change, which didn't leave enough time to arrange a new mortgage. Martyn says "I was left with no choice but to take the variable rate the building society were offering."
He adds, "This will cost me a couple of hundred pounds more a month than I was paying until I can sort out moving the mortgage to one of their deals".
His experience is not unusual and it's definitely worth trying to move onto a 'special offer' rather than the variable rate, which typically is the highest.
Beware the costs
However, the cost of switching mortgages to a new provider, or even moving mortgages with the same one, has shot up in the last couple of years as providers have increased set-up fees considerably, and this can offset the benefits.
You should always work out the total cost (including arrangement, legal and valuation fees, if they apply) and compare it with the repayment savings you can make.
For example, a borrower with a £150,000 mortgage would pay £¯¿½3,000 a year less in interest by switching from a standard variable rate of 7% to a lower two-year fixed rate of 5%. Even taking a one-off arrangement fee and other costs of £1,200 into account they would still save ¯¿½1,800 a year.
Brian Murphy, lending manager at the Mortgage Advice Bureau, a mortgage broker based in Derby, says unless a borrower is already on a low rate mortgage deal or they are planning to clear their mortgage in the near future then remortgaging should be their number one financial’s priority.
‘Borrowers paying their lender’s standard variable rate should be considering the other options available to them,’ says Murphy. ‘They can almost certainly save money elsewhere. If your current lender will offer you a better deal it might be worthwhile but you should also compare this to the rest of the market first before you make your choice,’ he adds.
Brokers recommend borrowers try to resist the temptation to extend their mortgage again when they remortgage to a new deal. If you do not begin to reduce the term of your loan you may still be paying the mortgage after you retire and this is likely to be a considerable financial strain.
‘If you are able to afford it, try reducing the term of your mortgage,’ says Murphy at the Mortgage Advice Bureau. ‘This way you will pay off your mortgage faster at the current low rate and save money in the long term.’
Top tips
- Read the small print. Check that your existing mortgage does not have an exit penalty if you switch. These charges need to be taken into account when weighing up the advantages of remortgaging.
- Seek independent advice from a mortgage broker. The internet can be helpful for those who want to do their own research and seek out best buy deals but a broker can also save time and search out top rates.
- Speak to your existing lender. Tell your lender you are considering remortgaging and ask what deals it can offer. Some banks and building societies will offer good deals to get customers to stay rather than switching away. Retention mortgage products can be good value when the extra costs associated with remortgaging to another lender are taken into account.
- Fee-free deals may not be as attractive as they first seem. Often with fee-free mortgage offers the fees have simply been costed into the interest rate you pay, so over the term of the deal they may not work out any cheaper. Do your sums before you switch.
