Guide to Remortgaging

Use the links below to move to the section you want to read:

• What is remortgaging?
• How popular is remortgaging?
• What are the benefits of remortgaging?
• Flexible mortgages
• Offset mortgages
• How do I go about remortgaging?
• What are the costs involved in remortgaging?
• Less obvious costs
• Potential pitfalls of remortgaging

The definition of 'remortgaging' is when you change your mortgage to a totally different lender. However, the term is often (incorrectly) used to incorporate occasions when you do the following:

Take a further advance

This is where you stay with the same lender and mortgage, but borrow more against the increased equity in your home. (You can also do this at the same time as remortgaging to another lender, providing you meet its criteria).

If you are staying with the same lender, the extra borrowing usually constitutes a separate loan which runs alongside your existing mortgage. In this case, it doesn't matter if you are tied into your existing mortgage as you are not redeeming it - simply adding to it.

In most cases, you will be able to have a 'further advance' on any mortgage product within the lender's current range, although some will apply their more expensive Standard Variable Rate (SVR) to the extra borrowing.

Borrowers should be wary of the effect of having two separate loans secured against one property. This often results in two sets of tie-ins that mature at different times - and in effect, you will be tied to the lender for the duration of the longest one.

Transfer your product

This is where you keep your mortgage with the same lender but switch products, requiring that a 'deed of variation' is signed.

You will only be able to carry out a product transfer without penalty, if your current deal - a two-year fix for example - has come to an end. Then, in some cases, such as with the Woolwich, you will be able to switch to any of its current mortgage offers. Other lenders however, such as Halifax, hold back some of the cheapest deals exclusively for new borrowers. This can cost remortgagers up to 0.5 per cent in interest according to broker, John Charcol.

Shopping around regularly for a new mortgage deal every few years is a relatively recent phenomenon. In the 1970s and 1980s, people were pathetically grateful to be given a mortgage at all and a deposit would be essential. Borrowers tended to stick with the same mortgage for 25 years and paid whatever interest was required - almost always on a variable basis.

Nowadays, it is a different completely different story. According to the Council of Mortgage Lenders (CML), 37 per cent of all lending by value is currently for remortgages and financial statisticians, Moneyfacts, says that of the 75 per cent of all UK borrowers that are on fixed rate mortgages, 35 per cent have two-year deals.

There are several reasons why people choose to switch current lender.

Complacency is expensive

At the end of any deal, whether fixed, capped, discounted or tracker, your lender will automatically move you to its Standard Variable Rate (SVR), currently around typically around 6.75 - 7.05 per cent. So if you don't negotiate a new mortgage deal, you will continue to pay the SVR which could be up to 2.5 per cent more than the best deals on offer elsewhere.

For instance, two of the best two-year fixed rates currently available are from Nationwide Building Society and BM Solutions, priced at 4.47 and 4.49 per cent respectively.

Remortgaging to Nationwide's deal (available on up to 90 per cent Loan to Value) would save you a staggering £270.16 a month on a 25 year repayment mortgage of £200,000, compared to a typical SVR of around 7 per cent.

Myriad of new types of mortgage

Even if you are satisfied with your current mortgage rate, the mortgage market in the last five to 10 years has changed significantly and there are literally thousands of variations of mortgage to choose from.

For example, some lenders now offer fully flexible mortgages. Although there is no industry definition of 'flexible,' a mortgage branded as such is generally expected to carry six features.

These are the ability to:

• make overpayments
• make underpayments - usually to the level to which you have overpaid
• take payment holidays
• borrow back from your mortgage without 'remortgaging'
• pay interest on a daily rather than annual basis - is more cost effective for you as your debt is reduced more quickly, and
• pay off the mortgage at any time without paying a redemption penalty.

Even many non-flexible standard mortgages now allow you to overpay by a certain amount each year, penalty-free.

All mortgages at Yorkshire Building Society, for example, allow borrowers to repay an extra 10 per cent of the outstanding loan each year free of charge, while Nationwide allows borrowers to make overpayments of up to £500 each month on its fixed and tracker mortgages penalty-free.

These allow you to offset the interest on your savings (provided these are held with the same provider) against your mortgage interest.

For example, if you have savings of £10,000 and a mortgage debt of £200,000, you will only pay interest on the remaining balance of £190,000.

Standard Life Bank, for example, allows borrowers to add an offset facility onto the vast majority of its standard residential mortgage deals for a one-off fee of £99.

But mortgage offsetting is only suitable for people with fluctuating earnings, due to the payment of large bonuses, commissions or freelance earnings at irregular intervals, such as barristers, stockbrokers and city traders.

Ray Boulger, senior technical manager at John Charcol says: "As the best offset mortgage rates have moved closer to mainstream rates, offset mortgages have become suitable for more people, but generally speaking, they are best suited to people with volatile cashflows."

Once you have decided that a remortgage is for you, you will need to source the cheapest, most useful and appropriate new mortgage deal for your circumstances. There are a number of ways to go about this.

Negotiating with your current lender

Although lender loyalty is pretty much a thing of the past, you may at least want to see what your current lender will offer you before you decide to remortgage. It could be that, if you have been a reliable customer, have a relatively large loan with a small loan to value, your lender will pull some strings to retain your valuable business. However, flexibility varies from lender to lender and in most cases, you should expect negotiations not to be fruitful. But it's worth a go as some lenders, such as Abbey, take a very flexible view on remortgagers and will go considerable lengths to retain your custom.

Using a financial adviser

In November 2004, mortgages - and at the same time, financial advisers - came under the jurisdiction of the Financial Services Authority (FSA). A month later, the FSA split financial advisers into three categories:

• tied advisers, who give advice only on mortgage products of the lender they work for;
• multi-tied advisers who give advice on mortgage products offered by a limited range of lenders; and
• independent financial advisers (commonly known as IFAs) who must give totally impartial advice and make recommendations from the entire market. According to IFA directory, IFA Promotions, 30 per cent of all remortgagers take the IFA route.
• Researching online. The difference between today and the last time you may have looked for a mortgage is that you can now do all the legwork online. There are several broker sites that will scour the mortgage market on your behalf once you have input your borrowing requirements and your financial status.
• Doing some research in advance can give you a better understanding of what's out there as well as potentially save you money.

In the face of tougher competition, an increasing number of lenders offer 'fee-free' remortgaging, which means they will pay for the valuation and legal fees on your behalf.

One of the cheapest deals currently on the market is Woolwich's lifetime tracker mortgage which is pegged at Bank of England base rate plus 0.17 per cent or 5.17 per cent (5.40 per cent APR).

It comes with free valuation and legal fees, no arrangement fee and no tie-ins, leaving you free to redeem the mortgage at any time cost-free. It is available at up to 80 per cent loan to value (LTV).

Other lenders may restrict fee-free remortgaging to a limited selection of products. But for the lenders that don't offer free remortgaging at all, you can expect to pay the following:

• Valuation fee: The new lender will want to see that that the security for its money (namely your house) is adequate. In this case it will want a valuation of your property, which will cost you in the region of £200 +VAT.
• Legal fees: You will also need to pay for conveyancing (the legal work of transferring your mortgage), which depending on the complexity of the application, could anything from £300- £1,000 +VAT.
• An arrangement fee: This is usually payable to the new lender when taking a fixed rate mortgage although it could apply to some other deals too. A typical arrangement fee is around £500 but where the interest rate is very low, it could be up to £1,500

Bear in mind that 'free legals' are often on condition that you use the lender's own solicitors. If you want to employ your own solicitor, the lender is likely to cap the amount attributed to legal fees - typically at £250.

Bear in mind that even when valuation and legal fees are marketed as free, they are usually payable on completion of the mortgage - which means you will still have to pay the money upfront.

In some cases, where the rate is even lower, it is increasingly common for the fee to amount to a percentage of the loan.

A recently launched Northern Rock two-year fixed rate mortgage at 3.99 per cent, for example, charged a staggering 2.5 per cent of the loan. So if you transferred a mortgage of £200,000, it would cost you £5,000 for the privilege. Arrangement fees can usually be added to the loan, but bear in mind that this means paying interest on the money for the remaining term of your mortgage.

The costs don't stop there. Regardless of whether your remortgage is marketed as 'free' or not, the following less obvious costs could be payable.

Broker fees. Since financial advisers were regulated in 2004, there are three ways in which you could be charged:

1. Fee-only: This is where you pay an hourly rate to the adviser. A retainer may also be agreed whereby you pay a certain amount each year and then pay a reduced rate on hours of advice given.
2. Commission: Alternatively, the adviser could work on a commission basis. This is where you do not pay the adviser directly but they receive commission from the lender which is typically a percentage of the loan. If you pay nothing direct to the adviser, you may well pay indirectly via a higher arrangement fee or interest rate.
3. Fees offset: This involves the adviser offsetting commission or the 'procuration' fees received from the lender against his fee to you for advice.

All advisers - whether independent, tied or multi-tied - are legally obliged to disclose up front how they charge. However, only an IFA is legally required to scour the entire market. To find an IFA local to your area, visit the IFA Promotions website at www.impartial.co.uk

A deeds release fee. This pays for your existing lender to release its legal charge over your property and will cost in the region of £200.

Search fees. Your new lender may also want to check for new developments in your area that may have an impact on the value of your property. These searches will cost between £150 and £200.

There are a number of pitfalls with remortgaging which could either wipe out the money you thought you might 'save' by doing so, or make your finances inflexible in the future.

Paying to escape your current lender

If you are tied into a deal with your current lender, remortgaging to a cheaper rate could prove to be a false economy. This is because lenders will charge a redemption penalty during any tie-in period, which typically amounts to either a percentage of the outstanding loan or a percentage of the sum already repaid.

Tie-ins periods usually last for the same time as a particular deal - a five-year fix will come with a five-year tie-in for example. Sometimes redemption penalties are 'tiered' which means that the percentage charged decreases with each year of the deal. It is important to do your sums carefully and take all costs into account before deciding to remortgage as - after potential penalties and fees - you could find yourself in the same or even a worse position.

How long do you really get on your new mortgage deal?

When switching to a new deal that has a certain shelf life - a two-year tracker for example - the two years may not necessarily start from the day you complete on your remortgage.

Deals can carry an expiry date based on their launch date, so you might find a 'two year' deal only lasts one year and nine months if you actually start repayments three months after launch date.

• The temptation of upping your loan when remortgaging. Many homeowners, when switching lenders, decide to take a 'further advance' against their property at the same time, using the extra funds to pay off more expensive unsecured debt or even to make home improvements.

Bear in mind that this usually only makes financial sense if house prices continue to rise. Although Halifax reports that house prices have risen 187 per cent since the housing market began its recovery in February 1996, no one should assume that this will continue in the future.