Interest rates are at historically low levels and there are now thousands of different mortgages available in the UK with new deals being introduced every day. Do you have the most suitable mortgage which you pay for at a competitive rate? Are you making the most of your mortgage? Should you be borrowing more money or paying off your mortgage as quickly as you can?
It is important to ensure you have the right mortgage for you, but with UK Base Rates having fallen from 15% in October 1990 to 5.25% in March 2008, it's equally vital to ensure you're not paying over the odds for your mortgage. It is estimated that 4 out of 10* people paying off a mortgage in the UK would be better off in a different mortgage. If you are considering remortgaging, you should be sure to get your facts straight you start the process.
Borrow more or make overpayments whilst you can?
Years ago it was against the rules for people to take out a mortgage for anything other than house purchase and home improvements. But times have changed. Nowadays, you don't even need to specify why you are remortgaging as long as the value of your property to which the new mortgage is attached is worth more than the loan and you are able to meet the mortgage payments.
Many of us have sat back in astonished satisfaction as house prices climbed to new peaks over recent years. But at the same time, almost as many of us have found it increasingly difficult to make ends meet - running up overdrafts on our bank account and putting an ever greater strain on our increasingly broad range of credit cards.
With mortgage rates at historically low levels, remortgaging to release equity or to consolidate credit card and loan debt can seem appealing, but do remember that mortgages are repaid over a long period; usually 25 years. The cost of releasing equity can be very expensive over the term even though the interest rate paid monthly on the mortgage is lower than the interest charged on any unsecured loan or credit card. You could wind up paying a lot more over the long term by repaying debt through a mortgage then through another type of loan.
In financial planning terms, buying the property outright that you want to live in should be near the top of your financial planning priorities. Mortgages should be repaid as soon as possible as they become expensive over the longer term due to effect of the interest being multiplied by the number of years of outstanding debt. This is how mortgage companies make their money. They know that once a person has moved into their property and chosen their mortgage, which is often from their own bank or building society they are unlikely to move their mortgage elsewhere. But you need not be one of these mortgage ostriches.
This is where an independent financial adviser (IFA) comes in - he or she can talk through your financial situation and advise you on your various options. This way you can see clearly what the immediate impact of remortgaging might be and, most importantly, avoid any future repayment difficulties should interest rates begin to rise.
Review your mortgage regularly
It's important to review your mortgage regularly, not only to see if you could be saving money, but to ensure the terms you have agreed to continue to suit your personal circumstances.
For example some people may be stuck with a mortgage term that runs on longer than the day that they want to retire. But not many people will have built up a pension fund large enough to provide enough income to pay for their chosen standard of living and keep paying off a mortgage. It may be that they need to remortgage to reduce, or even increase the length of their mortgage term.
Mortgages have become increasingly flexible, with many products now allowing borrowers room to vary the amount they repay to suit their circumstances, or even to take limited repayment 'holidays'. You could even combine your mortgage and savings into a single account and offset one against the other. Whilst some of these features may seem attractive, they may well come at a price, so it's worth considering which ones you would actually use.
Once you've decided whether you're better off remortgaging, an IFA can help you either to arrange changes to your mortgage with your existing lender, or if necessary to find a more suitable product from a different provider.
But won't the cost outweigh the benefits?
Many people are put off remortgaging by the perceived cost and hassle of switching between lenders and paying the various involved. However, even when you add up the associated costs of remortgaging such as the valuation fees, legal fees and the time taken to deal with the paperwork - changing to a different mortgage can still prove to be a very sensible decision.
In many cases the mortgage provider may help you with these initial costs. If you have a good credit history and have never failed to pay for your existing mortgage on time, it can also be very simple to remortgage. The completion of a short application form, proof of your income and granting permission for your new mortgage provider to talk to your existing mortgage provider is in many cases all that's required.
Check whether you would have to pay a penalty for moving your mortgage to a different lender. Although so-called 'redemption penalties' charged by lenders have become generally less severe in the last few years, if you took out your mortgage a while ago you may find you still have to pay a proportion of your outstanding loan back to escape to another lender. In spite of this it can still make financial sense to pay this penalty for the savings made by switching to a cheaper or more flexible deal.
Take advice to help you decide
Finally, in all matters relating to remortgaging independent financial advice can really help you make the right decision. Because not only is it prudent to take a second opinion and work out exactly whether you can afford the extra outgoings from your income, an independent financial adviser can put the decision in the broader context of how your finances are likely to stand 5, 10 or even 20 years from now.
That means taking inflation into the equation and setting the cost of your mortgage off against the other major drains on your income - living expenses, pension contributions, loans, the cost of children and the like. It's only when you've worked out the whole picture with an experienced qualified IFA, that you can make a decision and be confident that it's the right one.
Independent financial advice is offered wherever you see the blue IFA pound sign logo. Arrange a meeting with an adviser who will be pleased to tell you about what's most likely to suit you and the best offers in the market at the moment. You can find details of your local IFA's by logging on to www.unbiased.co.uk or calling the freephone hotline on 0800 085 3250.
Independence is the key word here - because although many banks and building societies would be pleased to offer you their mortgage services, the only lending services they would offer would be theirs! IFAs look at the whole universe of products before making a recommendation - not just one supplier. So, although you might think you've done well with a traditional bank or building society product, the chances are you could have found a more suitable mortgage for your circumstances.
If you're considering a remortgage visit an IFA first and their advice could save you from making a costly error.
Your home may be repossessed if you do not keep up repayments on your mortgage.
A person authorised and regulated by the Financial Services Authority (FSA) has approved this fact sheet. IFA Promotion takes no responsibility for any action, which an investor takes, based on this information.
The name IFA Promotion® and the Independent Financial Adviser (IFA) logo® are registered trade-marks of IFA Promotion Limited.
April 2008
