The offer of a new remortgage deal with a lower interest rate may be tempting – but there are a number of pitfalls to be wary of to make sure you get a good deal.
Early repayment charges (ERCs)
Early repayment or redemption charges (ERCs) are used by lenders to keep homeowners with them over the course of a set period.
For short-term fixed-rate mortgages, ERCs usually stand for the length of the initial deal – and are dropped when the mortgage switches to the lender's standard variable rate.
Before remortgaging it is worth checking the small print of your current deal to see when the ERCs stop applying – so you are not hit by a lender's higher standard variable rate (SVR) for too long or the ERCs themselves by switching too early.
On longer-term mortgages – of five, ten or 25 years – the ERCs tend to reduce over the length of the deal.
Those planning debt consolidation loans should also put ERCs into their calculations – if remortgaging to bring together all their debts.
Remortgaging costing more than saving
It is easy to be seduced by the lower rates on a remortgage deal – but it is necessary to factor in all the costs of switching lenders. Sometimes the extra costs can outweigh any potential gains.
Beyond ERCs (above) remortgagers also face legal fees and valuation fees. Usually the new lender will pay these costs – but not all lenders do and not in all situations.
New lender's fees
Fees when you start a mortgage are increasingly common and something to add to calculations when considering whether it makes sense to remortgage or not.
Setting up a new mortgage can leave you facing arrangement fees and reservation fees. Remortgage deals exist without the fees – but often the interest rates are higher.
Other costs include valuation fees – as the mortgage lender assesses the value of the property they are lending against - and legal fees. However many lenders do offer to cover these costs.
Higher lending charges could also be payable if you are borrowing over 90 per cent of the value of the property.
Those opting for a remortgage deal through a broker could face paying their fees – depending on whether the broker charges a fee or receives commission from a lender.
Daily or annual interest
A detail often missed when choosing a new mortgage deal is whether interest is calculated daily or annually.
It may seem like there is little difference between daily and annual interest – but with interest calculated annually it is only after a year of repayments that you benefit from a cut in repayments.
When a mortgage's interest is calculated daily as you repay, the amount owed is reduced and so are the repayments.
Source
Wednesday, October 28, 2009
Thursday, October 15, 2009
Goodbye to the 0pc mortgage
Thousands of home owners who are currently enjoying rock-bottom mortgage rates will soon see these ultra-cheap deals come to an end.
Borrowers lucky enough to have snapped up tracker deals with Halifax, Cheltenham & Gloucester (C&G) and Birmingham Midshires two years ago have been paying zero interest on their mortgage for the past six months.And many more home owners have been enjoying rates of less than 1pc – with Abbey, Alliance & Leicester, Intelligent Finance and Saffron Building Society all previously selling tracker deals that offered substantial discounts off the Bank Rate – which has stood at just 0.5pc since March.
But in the next few months tracker deals will all expire, causing a sharp increase in monthly mortgage payments for many families.
For example, those on a popular Halifax tracker – which charged a rate equivalent to 0.51 percentage points below the Bank Rate – have been paying just £544 a month since March, assuming they had a £150,000 mortgage. These families will now have to find an additional £250 a month when they are moved back onto Halifax's standard variable rate (SVR) which currently stands at 3.5pc. On a £150,000 mortgage this will mean mortgage repayments of £792 a month.
Melanie Bien, a director of independent mortgage broker Savills Private Finance said: "Many mortgage holders face a payment shock in the coming weeks and months, as they come to end of the super-cheap tracker rate."
Richard Morea of mortgage brokers London & Country added: "Many home owners have been paying next to no interest on their mortgage. But these deals will end very shortly. These borrowers need to look closely at their circumstances to decide whether they want to remortgage now or not."
But Mr Morea points out that not all of these deals will automatically revert to the bank's SVR. Many of these mortgages offered "lifetime tracker" options, which still look competitive today.
For example, those coming to the end of one of Alliance & Leicester two-year tracker deals will pay just 0.99 percentage points above the Bank Rate for the life of the mortgage – giving a pay rate today of just 1.49pc. This is significantly below A&L's SVR of 4.99pc and likely to be more competitive than any mortgage deal available on the high street.
Intelligent Finance, Saffron Building Society and other A&L tracker mortgages all offer similar options.
And remember, borrowers are automatically moved onto this rate. There is no arrangement fees or legal costs to pay, and there will be no penalties for switching at a later date.
In contrast most trackers offered by Halifax, Abbey and C&G move customers straight onto that bank's SVR.
Mr Morea adds: "It is imperative the home owners find out from their lenders what rate they will pay when their current deal ends, before they look at remortgaging." Given the generosity of many of these deals, lenders are probably not going out of their way to highlight what a good rate you'll have. So make sure you ask the right questions – and don't assume you will be automatically move onto the SVR.
Those that don't have the option of a "go to" rate should check what SVR will be charged.
At one end of the scale is C&G and Nationwide building society – both charging a competitive 2.5pc. Those moving to this rate are still going to see an increase in their monthly mortgage payments – but they are unlikely to find another mortgage deal significantly cheaper, in the short term at least.
However Abbey is charging 4.24pc while both Woolwich and A&L charge 4.99pc. But these look cheap when compared to the SVRs charged by many smaller building societies. According to Moneyfacts, the financial information group, at least 20 charge more than 5pc, with the most expensive being Stroud & Swindon, Newcastle and Nottingham BS – all of whom have SVRs of 5.99pc.
Ms Bien added: "What you do next will depend on your lender. If it offers one of the cheaper SVRs you may be tempted to sit tight and rate until rates go up before remortgaging, as it is unlikely they will be able to significantly undercut this rate. In addition there will be no fees to pay, borrowers are not tied into any deal, and the amount of equity you have in your home is not an issue."
Ray Boulger, of John Charcol agreed. He said: "If makes sense for these borrowers to stay put rather than pay fees and get locked into mortgage deals. But for those on higher SVRs now could be a good time to pick up a good discounted deal."
Mr Morea points out that home owners should think about more than just the rate offered. They need to look at their own financial circumstances. "Those who know that they would struggle to repay their mortgage if interest rates increase significantly may want to consider a fixed rate, even if that means paying slightly more for this peace of mind in the short term."
No one has a crystal ball, but it is clear that interest rates can only go one way: upwards – although economists remain divided as to when rates will start to edge up, and how far they will go. But given many fixed rates are more than 5pc, many home owners are unwilling to pay significantly higher interest rates now on a hunch that rates will soon spiral.
Home owners also need to consider how much equity they have in their home. Those with less than 25 per cent will have a lot less choice, and the keenest rates are still primarily reserved for those with looking to borrow just 60pc or less of their property's value.
So what deals are available? Most borrowers agree that, in terms of rate, home owners can't beat HSBC's two-year discount deal, with a current pay rate of 1.99pc. Borrowers pay 1.95 percentage points below HSBC's main SVR. But this is only available to those on a 60pc loan-to-value, and it comes with a £1,199 fee. (Those with less equity can still get this deal, but the discount is narrower).
Other options include Woolwich's lifetime tracker. Here home owners' pay 2.47 percentage points above the Bank Rate (giving a current rate of 2.97pc) for the life of the mortgage. This also has an offset option, is available for loan up to 70pc of a property's value and comes with a £1,499 fee.
The best fixed-rate deal at the moment is from First Direct, charging 3.49pc for a two-year fix. Again this is only available to those with substantial equity (40pc) and comes with a hefty fee (£1,298).
Anyone thinking of remortgaging through should be aware of the potential pitfalls of some of these deals. The cheapest mortgages are invariably discounts now, as opposed to trackers. These follow the lenders' own SVR rather than the Bank Rate. This means there is no guarantee that rates will not move in line with the Bank Rate. HSBC, for example, has only cut its SVR by 2.31 points between October and March last year, despite the fact that the Bank Rate fell by 4.5 points.
Those who want a tracker, which guarantees to follow interest rates, should look at First Direct's tracker deal – paying 2.29 percentage points above Bank Rate for life. This gives a current pay rate of 2.79pc.
Lenders should also be wary of "overhanging" redemption penalties. The Woolwich deal, for example, recently launched a super-low tracker rate at 1.98pc for a year but there is a 2pc penalty to pay if borrowers want to move within two years.
Source
Borrowers lucky enough to have snapped up tracker deals with Halifax, Cheltenham & Gloucester (C&G) and Birmingham Midshires two years ago have been paying zero interest on their mortgage for the past six months.And many more home owners have been enjoying rates of less than 1pc – with Abbey, Alliance & Leicester, Intelligent Finance and Saffron Building Society all previously selling tracker deals that offered substantial discounts off the Bank Rate – which has stood at just 0.5pc since March.
But in the next few months tracker deals will all expire, causing a sharp increase in monthly mortgage payments for many families.
For example, those on a popular Halifax tracker – which charged a rate equivalent to 0.51 percentage points below the Bank Rate – have been paying just £544 a month since March, assuming they had a £150,000 mortgage. These families will now have to find an additional £250 a month when they are moved back onto Halifax's standard variable rate (SVR) which currently stands at 3.5pc. On a £150,000 mortgage this will mean mortgage repayments of £792 a month.
Melanie Bien, a director of independent mortgage broker Savills Private Finance said: "Many mortgage holders face a payment shock in the coming weeks and months, as they come to end of the super-cheap tracker rate."
Richard Morea of mortgage brokers London & Country added: "Many home owners have been paying next to no interest on their mortgage. But these deals will end very shortly. These borrowers need to look closely at their circumstances to decide whether they want to remortgage now or not."
But Mr Morea points out that not all of these deals will automatically revert to the bank's SVR. Many of these mortgages offered "lifetime tracker" options, which still look competitive today.
For example, those coming to the end of one of Alliance & Leicester two-year tracker deals will pay just 0.99 percentage points above the Bank Rate for the life of the mortgage – giving a pay rate today of just 1.49pc. This is significantly below A&L's SVR of 4.99pc and likely to be more competitive than any mortgage deal available on the high street.
Intelligent Finance, Saffron Building Society and other A&L tracker mortgages all offer similar options.
And remember, borrowers are automatically moved onto this rate. There is no arrangement fees or legal costs to pay, and there will be no penalties for switching at a later date.
In contrast most trackers offered by Halifax, Abbey and C&G move customers straight onto that bank's SVR.
Mr Morea adds: "It is imperative the home owners find out from their lenders what rate they will pay when their current deal ends, before they look at remortgaging." Given the generosity of many of these deals, lenders are probably not going out of their way to highlight what a good rate you'll have. So make sure you ask the right questions – and don't assume you will be automatically move onto the SVR.
Those that don't have the option of a "go to" rate should check what SVR will be charged.
At one end of the scale is C&G and Nationwide building society – both charging a competitive 2.5pc. Those moving to this rate are still going to see an increase in their monthly mortgage payments – but they are unlikely to find another mortgage deal significantly cheaper, in the short term at least.
However Abbey is charging 4.24pc while both Woolwich and A&L charge 4.99pc. But these look cheap when compared to the SVRs charged by many smaller building societies. According to Moneyfacts, the financial information group, at least 20 charge more than 5pc, with the most expensive being Stroud & Swindon, Newcastle and Nottingham BS – all of whom have SVRs of 5.99pc.
Ms Bien added: "What you do next will depend on your lender. If it offers one of the cheaper SVRs you may be tempted to sit tight and rate until rates go up before remortgaging, as it is unlikely they will be able to significantly undercut this rate. In addition there will be no fees to pay, borrowers are not tied into any deal, and the amount of equity you have in your home is not an issue."
Ray Boulger, of John Charcol agreed. He said: "If makes sense for these borrowers to stay put rather than pay fees and get locked into mortgage deals. But for those on higher SVRs now could be a good time to pick up a good discounted deal."
Mr Morea points out that home owners should think about more than just the rate offered. They need to look at their own financial circumstances. "Those who know that they would struggle to repay their mortgage if interest rates increase significantly may want to consider a fixed rate, even if that means paying slightly more for this peace of mind in the short term."
No one has a crystal ball, but it is clear that interest rates can only go one way: upwards – although economists remain divided as to when rates will start to edge up, and how far they will go. But given many fixed rates are more than 5pc, many home owners are unwilling to pay significantly higher interest rates now on a hunch that rates will soon spiral.
Home owners also need to consider how much equity they have in their home. Those with less than 25 per cent will have a lot less choice, and the keenest rates are still primarily reserved for those with looking to borrow just 60pc or less of their property's value.
So what deals are available? Most borrowers agree that, in terms of rate, home owners can't beat HSBC's two-year discount deal, with a current pay rate of 1.99pc. Borrowers pay 1.95 percentage points below HSBC's main SVR. But this is only available to those on a 60pc loan-to-value, and it comes with a £1,199 fee. (Those with less equity can still get this deal, but the discount is narrower).
Other options include Woolwich's lifetime tracker. Here home owners' pay 2.47 percentage points above the Bank Rate (giving a current rate of 2.97pc) for the life of the mortgage. This also has an offset option, is available for loan up to 70pc of a property's value and comes with a £1,499 fee.
The best fixed-rate deal at the moment is from First Direct, charging 3.49pc for a two-year fix. Again this is only available to those with substantial equity (40pc) and comes with a hefty fee (£1,298).
Anyone thinking of remortgaging through should be aware of the potential pitfalls of some of these deals. The cheapest mortgages are invariably discounts now, as opposed to trackers. These follow the lenders' own SVR rather than the Bank Rate. This means there is no guarantee that rates will not move in line with the Bank Rate. HSBC, for example, has only cut its SVR by 2.31 points between October and March last year, despite the fact that the Bank Rate fell by 4.5 points.
Those who want a tracker, which guarantees to follow interest rates, should look at First Direct's tracker deal – paying 2.29 percentage points above Bank Rate for life. This gives a current pay rate of 2.79pc.
Lenders should also be wary of "overhanging" redemption penalties. The Woolwich deal, for example, recently launched a super-low tracker rate at 1.98pc for a year but there is a 2pc penalty to pay if borrowers want to move within two years.
Source
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