Mortgages are the pelicans of the financial world – seriously big bills. So if you languish on a bad deal it’s very likely to be your biggest waste of cash too.
Brexit uncertainty may loom large, but mortgage rates are still pretty near all-time lows, so it’s an opportune time to check if you can undercut your current deal. This is especially important if you’re one of the two million people sitting on a lender’s standard variable rate (SVR).
The potential savings are not to be sniffed at. For example someone moving a £150,000 SVR mortgage of 4 per cent to a cheap 1.5 per cent two-year fix (quite do-able for some, cheap five year fixes are around 2 per cent) will save around £4,000 over two years, even after fees. Take Karen who emailed to say, “I moved from an SVR to a fix. By keeping monthly payments the same, I knocked nine years off the term, saving £54,000.Thanks.”
Step 1: Find the facts about your current mortgage
Dig out the details of your existing deal, and see if it’s worth remortgaging (ie, switching to save). You’ll need to know…
a) What’s the rate? Plus monthly payments and outstanding debt.
b) What type is it? Fix, tracker, discount, SVR.
c) When is the intro deal over? For example, when does the two-year fix end exactly?
d) How long is the full mortgage term? When must it be fully repaid? In ten, 15, 25 years?
e) Will I be penalised? Are there any early repayment/exit penalties?
Critically, work out your current loan to value (LTV) – the proportion of your property’s current value you’re borrowing. For example, £90,000 on a £100,000 property is 90 per cent LTV. For each 5 per cent your LTV drops, usually until 60 per cent, the cheaper the deal. So if your home’s increased in value since you got your mortgage, you may gain. Full help on this in my free remortgage guide www.moneysavingexpert.com/remortgaging.
Step 2: Benchmark the cheapest rates
For an easy benchmark of what’s available in your circumstances, start with a comparison site that includes all deals, including “direct only”, those that aren’t offered by broker. You can use my comparison at www.moneysavingexpert.com/mortgagebestbuys and sites such as www.moneyfacts.co.uk.
Step 3: Calculate how much cheaper a new deal is
A good way to compare mortgages is to divide the fee across the discount or fixed period. So a £1,200 fee on a two-year deal is £50 a month – then add that to the monthly repayment (my best buys tool above does this for you).
For smaller mortgages it’s worth checking if your existing mortgage provider has a cheaper deal; as it may have no fees for shifting to it. There’s a calculator to compare two mortgages at www.moneysavingexpert.com/mortgaegcalc.
Step 4: Think about whether you’ll be accepted
This can be tricky – there are two factors...
– Are you creditworthy? Your credit history is a huge part of whether you’ll be accepted for any type of credit, including a mortgage. Be careful before applying for a mortgage to protect it, don’t make too many applications for other credit, don’t withdraw cash on credit cards and never miss or be late with debt repayments.
– Will you pass affordability checks? Lenders won’t just check if you can afford the monthly repayments at the current rate, but they’ll also stress test affordability if rates were 6 per cent or 7 per cent. And crucially this doesn’t only apply for new mortgages, it’s also for remortgages (which is ridiculous and on a side note I’ve been campaigning against this, and last week the regulator, the FCA agreed to consult on changing its lending rules to help free 140,000 ‘mortgage prisoners’).
So it’s really important you reel in your spending months before applying, as lenders will want evidence of income, big bills, expenses and even eating out.
Step 5: Consider using a mortgage broker
Brokers can match you to the right deal, as they have access to info that consumers don’t, such as credit-scoring and affordability criteria. They also have access to different deals than are offered directly to borrowers.
But do ask if the broker will check all deals available to them and not just a panel of lenders. Also, check how much using a broker will cost and ensure you use a qualified one. For face-to-face help ask friends for local broker recommendation or use Unbiased.co.uk or VouchedFor.co.uk to find one. There are fee-free brokers, who just take a commission from the lender, available on the phone such as www.landc.co.uk.
There is also the question of whether you should wait to see Brexit’s impact on interest rates. However, the one certainty about Brexit is the uncertainty, both of the outcome and then the impact of each outcome. For example, if the Bank of England’s right that a no-deal means an economic downturn (and that’s a big if), on one hand you’d expect an interest rate cut to stimulate spending, but as the pound would also likely drop, pushing up inflation, that predicates a rise. So forget predictions – no one knows.
What we do know is new mortgage rates are still cheap, and there’s more room for them to rise than drop. So if certainty is what matters to you, get a cheap fix now, and the more you want certainty, the longer you should consider fixing.Generally you pay a little more to fix, but not much. I’m not saying that it’ll be the cheapest route, just that you’re far less subject to huge economic winds as well as price and budgeting certainty.
Martin Lewis is the Founder and Chair of MoneySavingExpert.com. To join the 13 million people who get his free Money Tips weekly email, go to www.moneysavingexpert.com/latesttip