Dear MoneySaver, Your Free Guide to wbr Remortgaging

Beazer House, Lower Bristol Road, Bath BA2 3BA Tel: 01225 408000 Fax: 01225 442622 www.lcplc.co.uk Dear MoneySaver, Your Free Guide to Remortgaging We are delighted to offer you a free copy of the MoneySavingExpert.com Guide to Remortgaging, sponsored by L&C. I hope that you find the guide not only informative, but that it will be your first step towards saving yourself £thousands. The guide provides a great starting point towards understanding how money can be saved by remortgaging. As well as saving money, remortgaging can also help raise money for home improvements, holidays, university fees – you name it. Many of our clients raise money by remortgaging, but still end up paying less each month than they were before they came to us. Don’t delay reviewing your mortgage! Remortgaging is surprisingly simple. L&C, one of the UK’s best known mortgage brokers, helps thousands of people save money each year. We recommend the best product from the whole market to suit your personal needs and charge NO FEE for our service. The process is conducted quickly over the telephone, with back up and advice provided throughout. For a free no-obligation review, simply call us on: Freephone 0800 953 0598. Alternatively, print out and complete the Freepost enquiry form at the end of this PDF, return it to us and we will call you. We look forward to hearing from you – and saving you some cash! Yours sincerely, Phillip Cartwright Managing Director Proprietors: London & Country Mortgages Ltd Directors: M R Edge P R Cartwright P J Bunton M G Cook J A Harrison Authorised and Regulated by the Financial Services Authority (FSA). Martin Lewis’ GUIDE TO REMORTGAGING SPONSORED BY Independence and Integrity This guide is sponsored by London & Country mortgages, that’s the reason it is free. So let me make something very plain. This guide is written with absolute editorial independence. What’s in it is purely dependent on my view of the best ways to save money and the sponsor’s view on that is irrelevant. However, the reason I agreed to allow London & Country to be the sponsor, which enables this printed guide to exist, is because after detailed research into those brokers that offer coverage nationwide, London & Country has come out as one of the top for each of the last five years. It’s very important that no one thinks this is the other way round i.e. that they are being recommended because they sponsor the guide. Like everything with MoneySavingExpert.com, the editorial (what’s written) is purely about what’s the best deal. If London & Country no longer offer the deal they currently do, and either start charging fees or stop being whole of market, I’d ditch it immediately. You can check if that’s happened via an up to date article on mortgage brokers on the site. Just go to www.MoneySavingExpert.com/mortgageadvice. This document does not constitute financial advice under the Financial Services and Markets Act 2000. If you require such advice, you should seek appropriate professional advice. London & Country accepts no responsibility for the content of this guide. The opinions and information presented in this document are those of MoneySavingExpert.com and are not necessarily the same as those which would be presented by London & Country, by whom this publication is sponsored. All information correct at time of going to press, July 2008. 3 Intro by Martin Lewis, Money Saving Expert It’s a no brainer. If your mortgage is your single biggest expenditure, then cutting its cost is likely to be your biggest single MoneySaver. So, rather than me going off on one here, explaining how amazingly different to other mortgage guides this is for a whole host of reasons, why don’t we both just get on with it and save you some cash? Written by Martin Lewis and Jennifer Bailey Contents 1. Why should I remortgage? 2. Why shouldn’t I remortgage? 3. What type of mortgage do I want? 4. Other things to consider 5. No such thing as a free lunch 6. How to do it 7. Watch out for the hard sell on… 8. End thought 1 6 8 19 21 25 31 34 ! Stop Press March 2009! The Mortgage World has changed It’s been an unprecedented recent time in the mortgage world, caused by the double whammy of the credit crunch and slumping house prices. This means the market has changed dramatically since the Guide to Remortgaging was last updated. We are in the process of fully updating that guide to reflect these changes. In the meantime, please read this quick briefing insert carefully to help understand what the changes mean for you. If you’re not certain, then ensure you get advice; see page 25 of the guide. You need much more equity to remortgage In the old days, good deals were shockingly available for those who were borrowing up to 125% of their home’s value. Now, that’s changed. • Borrowing under 60%: If you’ve a good credit history you should get the best deals. • Borrowing under 75%: If you’ve a good credit history, there are decent deals, though not the very best available. • Borrowing 75%-90%: Here, just getting a new mortgage deal will be tough, and it isn’t likely to be too cheap. • Borrowing over 90%: There’s little hope of getting a new mortgage deal. • All this is made worse by the fact that as house prices have dropped, the same amount of borrowing is now likely to be a bigger proportion of your home’s value than it used to be (see below). In addition. • Self Cert: There are virtually no mortgages left for people who cannot prove their income, eg. some of the self-employed. See page 19. • Sub-Prime: The days where you could get a mortgage with a poor credit history are now virtually gone, and the few that are available have hideous rates. See page 19. What have falling house prices done? If you’re moving house, the impact of house prices recent plummet could be beneficial if you’re upgrading, as the gap between your current property and the new one won’t be as big. Yet for people who are simply looking for a new mortgage deal, the slump in home values’ isn’t pretty. It means the equity in your property will have partly evaporated, which sadly makes the situation above even worse. Imagine this theoretical example as a demonstration. Take a property worth £200,000 in 2007 that you owed £150,000 on, then factor in a subsequent 20% drop in its value in 2009. 2007 Value Mortgage balance Amount owned Mortgage LTV £200,000 £150,000 Mortgage balance (minus 2 years’ repayments) £50,000 Amount owned 75% Mortgage LTV 2009 Value £160,000 £140,000 £20,000 87.5% As you can see, the drop in house prices has more than offset the amount of the mortgage that has been repaid. Couple this with the fact you now need MORE equity to get a decent deal, and you may now struggle to get a new mortgage offer. What you can do Now for the good news. The rate most (but not all) mortgages revert to after an introductory period is known as the standard variable rate (SVR). As UK interest rates have dropped, so have SVRs. Historically, SVRs have been hideously expensive, yet now they can often be cheaper than the rate you’re leaving. And if you’ve got limited equity in your home it may also be the cheaper than the best new deals. This is a major change from when the guide was written. See pages 10, 24. It’s all due to the credit crunch This is the term to describe the lack of lending between banks. The world’s financial system currently relies on banks lending to each other. In the past, banks and building societies relied solely on income generated from savers to then lend out as mortgages, personal loans and credit cards. But many now also rely on borrowing money from each other and, as that route has virtually dried up, they have little cash to lend. What has the credit crunch done? As there is less money to hand out, mortgage lenders have become more selective in who they lend to, to ensure the people they deem to be the best customers get priority. Those seen as better customers are those with large deposits and those with spotless credit histories. In other words, whereas once lenders salivated with glee at the thought of lending to anyone and everyone, and would throw money out there, now their fists are tightly clamped around every penny. 1 Why should I remortgage? Remortgaging means shifting your mortgage from one lender to another to get yourself a better deal. And you don’t even have to move house to do it. In recent years around a third of all home loans were actually remortgages as millions of canny borrowers took advantage of the UK’s hugely competitive mortgage market. There are many reasons why remortgaging made sense for them – and could make sense for you – but the main one is simple. Saving money. Big money. For most people, their mortgage is their biggest financial commitment. And it follows that streamlining the largest debt can produce the largest saving. If you’re the kind of person who shops around to get the cheapest television or DVD player, then you’re missing a trick by not using the same skills to save money on your mortgage. If, like many borrowers, you have your lender’s bog standard mortgage – known as the standard variable rate, or SVR – then you’re almost certainly paying too much. Lenders rely on these loyal customers to fund the new and shiny offers which look good in best buy tables and attract new borrowers on the move. Your paying over the odds allows someone else to play the system and profit. Why shouldn’t you be the one paying less? To give you some idea of the savings up for grabs, imagine you had a repayment mortgage for £100,000 and were currently paying 6% interest. Moving half way through your 25 year term to a 5% deal would save you almost £5,000. If you kept switching to the best deal every couple of years, you could save double that. And you may not even have to move your mortgage to another company to get a better deal. Before you go anywhere, challenge your current lender to give you a new offer. Remember, it makes money from your debt so it does want to keep your custom. 1 3 If you do need to move, remember that, although remortgaging can save you money, it does so at a price. In fact as fierce competition has drive down mortgage interest rates, the fees lenders levy have increased significantly. You may have to pay an exit fee to leave your current lender, and, depending on your deal, an early repayment charge as well. You may have to pay an arrangement fee to join your new lender, and face legal bills too. If you use a mortgage broker to help you find a new deal, some of them may charge too (although as we’ll discuss later, you can find brokers who won’t). This doesn’t mean you shouldn’t remortgage normally the savings will still be huge – but it does mean you should do your sums before taking the plunge. Other reasons But it’s not just about saving money. It’s also about getting a mortgage which is right for you and your situation. So here are some more reasons to think about remortgaging. It’s time to pack your bags Maybe you’re moving up the property ladder and need to borrow more money. Some mortgages are portable – that is you can transfer them to a new property. But if you also need to borrow more money at the same time to buy a more expensive property, it could make sense to take out a new mortgage for the whole lot. 4 2 You need extra cash and want to take advantage of the fact that your house has gone up in value The huge house price rises of the early 00’s mean even if there were a massive house price crash, most people’s properties are still worth more today than when they bought them. Remortgaging can help you capitalise on this. Say you borrowed £100,000 to buy a house for £110,000. If that house is now worth £150,000, then when you remortgage, that £50,000 growth is like extra cash in your pocket. It means the ratio of how much you own to how much you owe is better. This is called the Loan to Value ratio or LTV. The lower the LTV, the better and cheaper the mortgage deals get. Your mortgage doesn’t fit any more You’ve had a pay rise, or maybe you’ve inherited some money. You want to make extra payments to your mortgage but your current deal won’t let you. Or perhaps you need to be able to miss a payment. Changing jobs, going back into education, going travelling – whatever the reason, there are mortgages which will let you take payment holidays. Maybe you’ve been tempted by new and whizzy mortgages which combine your current or savings accounts with your mortgage. More about those later. Whatever flexibility you want in a mortgage, chances are it’s out there. But remember products don’t offer these twiddly bits for free. Expect to pay for flexible features with a slightly higher interest rate. So don’t be tempted to go for whistles and bells unless you will actually use them. It doesn’t do what it said on the tin If you are one of the millions of people in the UK who have been told to expect a shortfall on their endowment then you need to act now. You will still be responsible for paying off your mortgage on the due date, even if your investment has performed disastrously. It’s your problem, not your lender’s. 3 If you have an endowment mortgage then your monthly payment does two things. Some of the money goes to your lender to cover the interest on your loan. The rest of the money is paid to an insurance company which invests it on your behalf. What you are not doing is paying off any of the capital you owe. So if you borrow £100,000 on an ‘interest-only’ basis, you will still owe the bank £100,000 25 years later. If you’re lucky the money you have invested will have grown sufficiently for you to use it to pay off some or all of the debt. But in reality in recent years most insurance companies have cut the bonuses they pay investors with endowment policies, which means the money invested is unlikely to cover the mortgage debt, leaving policyholders with a shortfall. If you are in this position, it may make sense to convert some or all of your loan to a repayment mortgage to make sure that you’ll be able to clear the debt. This will cost more money every month, because as well as covering the interest you owe, you will also be paying off some of the capital. You then either cash in your endowment and use the lump sum to pay off some of your mortgage, or to keep it going as a separate investment. Deciding what to do with your endowment can be complicated – especially if you are relying on the life insurance provided by the policy – and you might need to take some specialist financial advice before deciding what to do. Many people with ISA or pension mortgages face the same uncertain future. Bad investment returns could mean they also struggle to repay their loans. Some estimates suggest there could be another million people who have interest-only mortgages but don’t have even a badly-performing investment to rely on. Some people plan to sell their house to pay the debt, assuming the property value will have grown sufficiently in the meantime to leave them a tidy surplus. But that’s not guaranteed – and in every case it does make sense to consider converting at least a portion of your loan to a repayment basis when you can. 4 4 You’ve got other debts elsewhere which charge much higher interest rates and you want to wrap all your debts into one If you have a lot of outstanding debts it might make sense to add them to your home loan. After all the interest rate you pay on your mortgage is probably half or even a third of what you pay on your other debts. But this is not something to do lightly. Remember you are securing this money on your home – so if at some point in the future you can’t make your repayments, your house is at risk. And of course if you borrow more and use the cash to pay off your credit card or bank loan, you will pay be paying interest on that extra money for as long as you have the mortgage. Martin’s Mortgage Moment Dumping other borrowings on your mortgage I always shiver slightly when people talk about adding non-housing debts to their mortgage, whether it’s for a new kitchen, a holiday or to consolidate existing borrowing. My problem isn’t that it is wrong per se, in fact often it’s a good move, but the issue is many people see it as a no-brainer solution. Let me make something plain. Borrowing 10% over 5 years is cheaper than 5% over 20 years. The amount of interest you pay is a combination of the rate and the length of the borrowing. Borrow on your mortgage and your overall interest you pay will usually substantially increase. There are times when this could be a necessary evil, perhaps to get you out of a hole, but it’s much better to pay a slightly higher rate with the flexibility to pay off the debt much more quickly. The one exception is if you’re using this strategy in conjunction with a mortgage which allows overpayments (more later), so you are actually paying the debts off in much less time. 5 2 Why shouldn’t I remortgage? Despite the potential savings available, there are some people who probably shouldn’t remortgage. It’s all a question of money, timing, and your personal circumstances. Essentially you have to decide whether the potential savings available at the point that you’re considering switching deals will outweigh the cost. Think carefully if you fall into one of the following categories: The Lucky Ones You may be already on such a fantastic deal that you’d be mad to move. But don’t get too comfortable – chances are it won’t always be top of the tree so eventually you’ll need to consider hopping onboard the remortgaging merry-go-round. The Unlucky Ones Alternatively you may be on such a terrible deal that has you locked in with such horrendous penalties that it’d be utter foolishness to move before the end of the term. But if you are on a really rubbish deal, then it’s all the more important that you do move as soon as you can. So do your homework, and be ready – and try not to think about how much money you’re wasting every month in the meantime. It’s possible your current lender might be persuaded to let you switch to another of its deals by paying a reduced early repayment charge. You’re unlikely to get to move to its top of the range deal but as long as it’s better than the one you’re currently on, you have nothing to lose. 6 The Ones with Bad Timing Mortgage rates and fees fluctuate constantly, in relation to the Bank of England’s base rate, what’s going on in the international money markets and lenders’ own business priorities. It is possible that the sums will simply not add up for you when you first consider remortgaging. In which case it may make sense to sit tight, and reconsider in a couple of months. The Ones whose circumstances have changed It’s possible that if your financial position has altered since you took out your current mortgage – if, for instance, one part of a couple has stopped working or you become self-employed – new lenders may not be prepared to offer you a loan because you no longer fit their criteria. Again, you may be better to stay where you are. The Ones with a very small mortgage Once your loan falls below a certain amount – say around £30,000 – it may not be worth switching lender simply because the amount you will save is very unlikely to justify the cost. And in fact some lenders won’t even take on a mortgage that small. Borrowers who are very close to the end of their mortgage term may also find it prohibitively expensive to move. 7 3 What type of mortgage do I want? Choosing a mortgage is like ordering breakfast in an American diner. It’s a series of choices which seem to go on forever but which should help you identify what you want. Think back to why you want to remortgage in the first place, and that should help you work out what you need your new loan to do. The first choice is between interest-only and a repayment. Unless you have a very compelling reason, repayment should be the way forward. It’s the only option which guarantees that you are actually paying off some of your debt every month. With an interest-only mortgage you just pay the interest on the debt, and in most cases, set up an investment which you hope will build up enough cash to pay off the actual cost of the house. There are some mortgages designed for first time buyers which let you just pay the interest for the first couple of years and then convert to a repayment. That might work if you’re struggling to get on the property ladder, but it’s important to make sure you do shift to repayment when you can. The sooner you start paying off your mortgage the sooner you’ll finish. 8 Martin’s Mortgage Moment Interest only mortgages aren’t bad “Eh … what … that’s not what you’ve said above. That’s not the prevailing wisdom in every newspaper, what you going on about Lewis?” All that’s true, but it’s over simplistic. While interest-only mortgages aren’t bad, they are risky. Risk is an important concept in finance, it’s about taking a chance. The historic problem with interest-only mortgages has been that most people who took them out did so without realising there was a risk. That is bad. The point is the investment you use to repay your interest-only mortgage may soar, in which case it pays off your house plus profit on top, or it may plummet in which case you need make up the shortfall at the end of the term. It is possible for a detailed rational gamble on an interest-only mortgage to pay off. Yet that gamble is beyond the scope of this guide. The reason most people are, and should be, cautioned against these mortgages, is planning, understanding and managing that gamble is complicated, and rarely something to risk your house on. Repayment versus interest-only is merely the first decision you have to make. What sort of repayment or interest-only deal do you want? 9 BOG STANDARD Standard Variable Rate (SVR) This is the simplest and most straightforward mortgage product you can get. The SVR is linked to – but is not the same as – the Bank of England interest rate, known as “base rate”. SVRs are generally a couple of percentage points or so higher than base. As the Bank of England shifts its rate up and down so lenders tend to move their SVRs. But beware, there’s nothing forcing lenders to do this, so often even if the Bank of England cuts rates by 0.25%, your lender might only reduce its rate by say 0.15%. Funnily enough when the Bank puts its rates up, lenders do tend to pass on the whole increase immediately and sometimes more on top. ✓ PROS Simple. ✗ CONS Expensive. No guarantee you’ll get the full benefit if rates fall. SPECIAL OFFERS Alongside their SVRs, banks and building societies offer a whole range of other mortgages. Most are special offers which last for a set period of time, after which lenders shunt customers back to the SVR where they hope you’ll stay. Many of the features below can be and are used in combination. Tracker Unlike the SVR, a tracker follows the base rate absolutely. So if rates go up by 1% your mortgage payment goes up by 1%. But if it falls by the same amount then your mortgage will drop by the full 1% as well. Tracker rates tend to be between 0.5% and 1% higher than the Bank of England’s base rate, although you can get deals which are slightly below it. Some products also have what’s called a “collar” – a minimum level below which the rate will not drop. So in the unlikely event that base rates fell to 2%, if your tracker had a “collar” of 2.5% your rate would not fall below that level. Some lenders offer “lifetime trackers” which guarantee to follow the base rate for the length of your mortgage. 10 ✓ PROS You get the full benefit of all Bank of England rate falls - subject to any “collar”. ✗ CONS You get the full benefit of all Bank of England rate increases. Discount With a discount mortgage you get a rate which is a set percentage below the lender’s SVR. So it’s the interrelation between the two which determines whether it’s an attractive proposition, as the following example shows: Huddline Bank This has a huge 2% discount for two years, but the discount is from an SVR of 7.5%. In other words the rate you actually pay is 5.5%. Cansistont Building Society This offers a 1% discount, again for two years, but this time from an SVR of 6.5%. So the rate you pay here is also 5.5%. So it’s important to make sure you know both the size of the discount and the level of the SVR. Some deals discount from a tracker rate rather than the SVR. For example, a lender could have a tracker where the rate is set at base rate + 0.75%, and then offer a two year 0.50% discount on top. That would mean you would end up paying base rate + 0.25% during that time. ✓ PROS Even if rates rise, you’ll be paying less than the SVR. If rates fall you get the full benefit. ✗ CONS Discounts tend to last for a relatively short period – typically 2 or 3 years. And your payments will always increase if the Bank of England puts up interest rates. 11 Fixed This is pretty simple really. The rate is fixed at the outset and doesn’t move for the length of the deal. Fixed-rate mortgages have become very popular in the last few years. Two thirds of all mortgages taken out in 2006 were fixed, the vast majority lasting for 2 or 3 years. Lenders will let you fix for 10, 15 or even 25 years, something the government is trying to encourage. But longer term fixed-rate deals have never really taken off, largely because, despite the fact that many of these deals will let you take the mortgage with you if you move, people, rightly, wary of locking-in for such a lengthy period. Early repayment charges often apply for the first 5 or 10 years of such deals. When getting a new fixed rate, the interest it’s set at is not always closely aligned to the Bank of England’s base rate. Instead lenders price their deals according to the cost of money they go out and buy on the wholesale money markets. This is why you often have to pay to ‘buy’ a fixed rate – it’s because the lender has to secure a matching pot of money to fund the loan. Although you are insulated from the effects of any rate rises during the period of the loan, if rates have gone up, you may face a steep increase at the end of the deal, so-called ‘rate shock’. ✓ PROS Certainty. Your payments will not go up if the base rate increases. Most long term fixed rate deals are portable. ✗ CONS You will not benefit from any falls in the base rate. You may have to pay a fee to book your rate. Long term fixed-rate deals tend to have extensive early repayment charges. The risk of rate shock at your end of the deal. 12 Martin’s Mortgage Moment Choosing between fixed and discount There is no right answer here. It depends on your circumstances and your priorities. A fixed rate is like an insurance policy against interest rates going up. That protection costs money, so other things being equal, unless there are exceptional circumstances, a 3 year fix is likely to have a higher initial rate than a 3 year discount. However the rate of the discount deal may go up or down. Do you need certainty? Shock, horror thought from the Money Saving Expert, but choosing a rate isn’t purely about which is the very cheapest. Deciding whether to fix is a question of weighing up how important that surety is for you. I tend to think of this as a “how close to the edge are you?” question. Someone who can only just afford their mortgage repayments should not be gambling with interest rates, and therefore will benefit much more from a fixed rate as it means they’ll never be pushed over the brink by a rate increase. Those with lots of spare cash over and above the mortgage may choose to head for a discount, and take the gamble that it will work out cheaper in the long run. Don’t look back in anger. If you do decide to go for a fixed rate on the basis of security and afterwards look back with hindsight and realise a discount rate would’ve been cheaper, this doesn’t mean it was the wrong decision. If you needed surety, remember you got it. As I love m’analogies, let me give you one. If I asked you to call head or tails on a coin toss and said I’ll give you £10 if you win, but you only need pay me £1 if you lose, then you should do it. While the bet itself doesn’t increase your chances of winning, the reward for winning is much better than the cost of losing. So if when we actually tossed the coin, you lost, the bet was still worthwhile. It’s the same with picking a fixed rate. 13 There are a couple of other special offer deals to consider: Capped With a capped mortgage, the rate you pay moves in line with base rate but there is an upper ceiling or “cap” above which it will not go. Some deals also have a lower limit or “collar” below which the rate will not fall, whatever happens to rates. As you might expect, these mortgages prove popular when people are frightened that rates might soar. They tend to be more expensive than fixes. There are only a handful of capped deals on the market, reflecting the falling popularity which has seen them account for only 1 or 2% of new mortgages in recent years. ✓ PROS You benefit from interest rate falls and have some protection against rises. ✗ CONS Limited product choice. The “cap” is often set quite high, and the starting rate can be expensive. Cashback With a cashback mortgage, your lender gives you, er, some cash back. Hence the name. You might get a lump sum back of say 5% or even 10% of the amount of money you borrow. Whilst this money is bound to come in handy, as ever, what your lender gives with one hand he takes back with the other. Generally cashback mortgages charge higher rates than standard loans and charge you penalties if you want to repay or switch your loan within a set period, usually 5 years. Basically your lender takes its cash back. ✓ PROS You get a nice cash lump sum. ✗ CONS You pay for it in other ways. Watch out for higher interest rates and hefty early repayment charges. 14 NEW AND WHIZZY All the mortgages we’ve looked at so far are variations on a pretty simple theme. You borrow a set amount of money, you pay back a certain amount every month, and your debt is the amount you borrowed minus the repayments you’ve made. So far, so straightforward. But the last few years have seen the growth of a completely different type of mortgage. It lets you use your savings and/or the money to ‘offset’ your debts, therefore reducing the total amount of money you owe. As with Bog Standard deals, these can be structured as variable, fixed or discounted deals. 15 Current Account Mortgage (CAM) The first offset mortgage launched in the UK was a current account mortgage. As the name suggests it combines your mortgage and current account to give you one balance. So if you have £2,000 in your current account and a mortgage of £90,000, then you are effectively £88,000 overdrawn. Your debt is therefore smallest just after your salary is paid in, and it then creeps up as you pay bills and so on throughout the month. You do make a standard payment every month which is designed to clear your mortgage over whatever term you choose. The extra money floating around in your account acts like an overpayment, which should mean you actually pay off the mortgage much more quickly. Any extra cash savings can be added to reduce the balance further. Or you can transfer other debts like credit cards or person loans to the account to take advantage of the lower interest rate. ✓ PROS If used correctly, someone who spends less than they earn each month is effectively overpaying their mortgage every month and so should clear it more quickly, potentially saving thousands of pounds. However this is not unique to CAMs – see ‘Martin’s Mortgage Moment’. ✗ CONS You have to be very organised with your money. Psychologically do you want to be permanently overdrawn? Plus the interest rates charged on CAMs are higher than those on normal deals. To work well you need to have a reasonable amount of money coming into – and floating around – your current account. 16 Offset Mortgages This time, instead of having one big pool of money, an offset keeps your mortgage, savings and current accounts in separate pots. But as above, your savings are used to reduce – or “offset” – your mortgage. So, if you have a mortgage of £150,000 and savings of £15,000, then you only pay interest on the £135,000 difference. As with the CAM you make your standard payment every month, but your savings act as an overpayment, wiping out more of the capital every month, helping you clear the mortgage early. It’s also a good deal in terms of tax. This is because the interest rate you would get if you put the £15,000 in a savings account is lower than the rate you pay on your mortgage. And you’d have to pay tax on any interest you got. Far better to pay less interest on your loan than earn interest on your savings. So these accounts can be particularly good value for higher rate taxpayers. They are also popular with self-employed people who can use the cash they build up over the year towards their tax bill to reduce their mortgage. ✓ PROS You effectively overpay your mortgage every month, letting you clear it more quickly, potentially saving you thousands of pounds. Your savings and debts are kept separate so it’s easier to keep track of your money. Tax efficient, especially for higher rate taxpayers. ✗ CONS As with CAMs, the interest rate is higher than on more straightforward mortgages. So you do need to have reasonably substantial savings – typically £40,000 – to make the sums add up. If you need to spend your savings for any reason, then your mortgage will become more expensive. 17 Martin’s Mortgage Moment Flexible facts Wooooah there. OK offset and current account mortgages sound great. Yet there’s a lot of hype mixed in with these flexible friends. The decision boils down to two questions. Will you use all the extra features? And is the higher interest rate you’ll pay off-set (ur hmm) by the benefit? Is it just the ability to overpay you want? The one facility most people use their flexible feature for is overpaying. This is the ability to pay off your mortgage more quickly in order to reduce the total amount of interest you will pay. Yet these days most bog standard mortgages will also allow you to overpay, and if that’s all you’re looking for, just get a normal cheap mortgage with an overpayment facility. Don’t believe the marketing My greatest wrath is saved for some current account mortgage providers. They provide illustrations which show how many tens of thousands “paying your salary into your mortgage” will save you. Yet this is a myth. Check the numbers behind those illustrations and you’ll see it always includes a fact similar to “you spend all bar £100 a month” – in other words you’re overpaying by £100 a month. While of course this overpayment is beneficial, it’s not unique to the current account mortgage. In fact the pure benefit of actually paying your salary into your mortgage account each month (if you take out the overpayment) is only equivalent to a 0.1% discount in interest rate, and these type of mortgages are a lot more expensive than that in the first place. Unless there’s a very special cheap rate these should most often be avoided. 18 4 Other things to consider Even once you’ve chosen the type of mortgage you want, there are some other things to check. Is the mortgage available for re-mortgages? Seems obvious but not all deals are. Will the lender lend me the money I want based on the value of the house? Most lenders will only let you borrow a certain proportion of the property’s value. This is the Loan to Value ratio or LTV. A typical LTV is 90%. You often get better interest rates if you can get down to 80% or under. Most people remortgaging get an extra boost from house price growth – they “own” more of their house so can put down a bigger “deposit” so they need to borrow less. This gives a healthier LTV ratio. Do I meet the lender’s borrowing criteria? Check whether you meet other requirements eg minimum salary or employment status. Beware if your circumstances have changed since you took out your current mortgage – you may not be able to borrow as easily – or as much – as before. Does the lender charge daily interest? This makes a huge difference to the amount of money you pay back. With daily interest, the amount you owe is recalculated every time you pay money off. And when you owe less, you pay less interest. With annual interest you don’t get the benefit of 12 months’ payments until the end of the period. Even if you move to a better rate, if the lender charges interest annually you could well be worse off. For example, if you had 10 years to go on your £115,000 mortgage, a 5.35% deal charging daily interest would actually be better value than a rate of 5% where interest was calculated annually. 19 Are there any extended ‘early repayment charges’ (previously known as redemption penalties)? If you go for a deal for a set period – say a 3 year fixed rate or a 2 year discount – you need to check what happens at the end. While most people accept they will be penalised for getting out of the deal during the initial period, it also used to be common for lenders to continue to charge early repayment charges after this – hence “extended”. These are gradually dying out, but check and avoid like the plague. What happens if I need to move house within the term of the mortgage? Many mortgages are now portable so moving house doesn’t have to involve a new deal. However, if you need to extend your loan at the same time it may make sense to remortgage. If this matters to you, be clear about what you can and cannot do. Can I overpay/make underpayments? If this was a key reason for changing your mortgage, make sure any new deal will let you do what you want it to. Many mortgages restrict the amount of money you can overpay to a maximum of £500 a month or 10% of the outstanding mortgage per year. Penalties if you go over these limits can be steep. In some cases, although the extra money you pay is knocked off your outstanding debt for the purposes of calculating interest, the lender keeps the money in a separate pot. You can draw on this in the future either by taking back a lump sum, or using it to cover future monthly payments. Or maybe you want to be able to take a payment holiday. Some mortgages do allow this, but beware, they don’t let you play hooky from the goodness of their hearts. You will pay for it. Typically borrowers arrange to miss one or two payments, and their monthly payments are recalculated to spread the cost of the payment you missed over the rest of the life of your loan. There could also be an extra penalty or administration charge on top. 20 5 No such thing as a free lunch Although remortgaging can save you a lot of money, there are costs you will have to pay. And these have risen sharply over the last few years. Pressure to keep headline interest rates down has meant that many lenders have increased the fees they charge borrowers who want to move to a new deal. It’s vital to make sure you’ll save more than you spend, or there’s simply no point remortgaging. Some lenders will pay some or all of your remortgaging costs but you can expect to get a less competitive rate in return, so although it costs less, you save less too. Mortgage regulation is supposed to ensure better disclosure of what deals cost to get in and out of, so in theory it should be relatively straightforward to crunch the numbers. Broadly fees fall into two categories: the cost of leaving your existing lender and the cost of joining your new lender. Fees to leave Auldstyle Building Society If you remortgage before the end of a fixed rate or discount deal period, then you will have to pay an early repayment charge (previously known as a redemption penalty). These tend to be on a sliding scale so the earlier you are in the deal, the more you will pay. On a 3 year fixed rate, you could be charged 3% of the loan amount if you immediately redeemed your mortgage, decreasing month by month to 2% at the start of the second year and 1% at the start of the third year. Occasionally you may be caught by extended early repayment charges after a deal has ended. 21 Some lenders will waive penalties in the last month of your deal if you move to another of their products. It’s always worth asking. Borrowers with cashback mortgages should also budget for a substantial hit. In some cases you could be asked to repay the whole lump sum you received if you redeem your mortgage within 5 years. You will also usually have to pay a mortgage exit administration fee. These have been around for a while – sometimes called deeds release, sealing or discharge fees – and are supposed to cover the administration costs when you pay off your loan. Many lenders had put these fees up in recent years – until what had tended to be a fairly small £50ish charge had jumped to over £200. Worse still many customers were being told they had to pay it, even though their original mortgage agreement stated the smaller amount. In 2007 the Financial Services Authority announced a crackdown on this practice. A few lenders dropped the fee altogether but most just decided to reduce it back to the original level. If you paid one of these previously it’s easy to reclaim the cash – see www.moneysavingexpert.com/mortgagefees. Fees to join Wantya Custom Bank Warning! Arrangement fee. Once a minor part of your mortgage deal, these are now almost as significant a factor as the interest rate itself. This charge for getting a new deal can vary enormously from lender to lender. In recent years they’ve shot up; where once £200-£300 was typical, now £500 is considered quite cheap and some lenders charge in the £1,000s. Whatever the fee, the amount can be added to your mortgage debt, which seems attractive in the short term, but it’s worth remembering this means you’ll be paying interest on it for as long as you have your mortgage. The reason for this is simple; by keeping the interest rate low their deals stay in the best-buy tables, yet they increase prices by upping the fee instead. 22 This has made comparing mortgage deals much more difficult. Never rely on interest rates alone; you must incorporate the arrangement fee into your overall costing. If you’re using a mortgage broker it should be able to crunch the numbers for you. A few lenders will charge you a reservation or booking fee to secure a fixed rate, typically £100 – £200. This is almost always non-refundable. It is also common to be charged a telegraphic transfer fee of around £30 to move the money on completion of the deal. You should also expect to pay a valuation fee for a survey of your property. This is to check a) it exists and b) that it offers the lender sufficient security for the loan. The cost varies according to property value and lender but it’s safe to budget at least £300. A small number of lenders will also charge you in the region of £30 if you refuse to take out their buildings insurance. This is usually worth paying to avoid being trapped with your lender’s preferred insurer – which often hikes premiums after the first year. Remortgaging also incurs legal fees even if you don’t actually move house. Many lenders will pay some or all of these, although generally such offers don’t apply to borrowers in Scotland where a different legal process applies. In any case, you will have to use a solicitor approved by your lender. They’re unlikely to pay for your own solicitor to do the conveyancing. If you have to pay for it yourself, you’re looking at around £500 – £600. If you are remortgaging because you are moving house, then remember you will also have to pay stamp duty land tax to the government. Even if your lender covers your legal fees, this won’t be included. In the tax year 2007/2008 there was no stamp duty payable on residential properties worth less than £125,000 but 1% was due on properties worth between £125,000 and £250,000, 3% for those up to £500,000 and 4% for those worth more. Don’t forget if you use a mortgage broker you may have to pay their fees. More on that in a moment. 23 Is it worth it? To establish whether it’s worth remortgaging, you need to work out whether the new deal in total is cheaper than the old one. • Add up the cost of staying put. Work out how much you’ll pay to stay where you are. This could be on your current rate, or it may be the standard variable rate if your current mortgage deal is ending. Just find out what the monthly repayments will be and any other fees. • Add up the total new deal cost. Get a redemption quote from your lender, specifying all the fees you will have to pay to leave it. Now see what the monthly repayment will be with the new lender for borrowing the full amount. At this point you have the monthly repayments… now calculate the cost over the special offer period (i.e. if it’s a two year deal, multiply by 24 to get the total two year cost). If you will save more than the new lender’s fees for moving, it’s worth doing. 24 6 Going Solo How to do it If you are confident you know what you want then there’s nothing to stop you remortgaging on your own, though as explained in a moment, most people are better off using a broker. But remember if the mortgage you choose turns out to be wrong for your circumstances, you’ll have no one to blame but yourself! The internet can help you get details of different products and compare offers. For more information, see www.MoneySavingExpert.com/mortgageadvice. Newspapers also regularly publish best buy tables. Beware, such tables do not always include all the fees you may have to pay. Step 1 Get a redemption quote from your lender. Challenge them for a better deal: you may not need to switch. Select the mortgage deal or deals you fancy. Get detailed quotes from the new lender(s). Add up all the fees to get a figure for the total cost. Work out your savings over a set period. Deduct the costs and work out if it’s worth moving. If you want to go ahead, apply to the new lender. Often this can be done over the telephone or internet. Valuation and legal work. This should take between 4 and 8 weeks. Completion. Start saving money. Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 25 Martin’s Mortgage Moment Surprisingly, advice is worth it Just going to your existing mortgage bank or building society is a waste of time. It will only look at its own products; whereas the best mortgage brokers view the entire market to find the cheapest deal. It’s find to ask it for its best offer, to find a benchmark, but don’t ever just stop there. Mortgage brokers speed it up and help… I’m not usually a huge fan of financial advice. It’s often costly, unwarranted, and as it concentrates on pensions, protection and investing, doesn’t even do the ‘sort my finances’ thing most people actually want. Yet my tone changes with mortgages; the right brokers can quickly source a top product, offer an extra layer of protection if things go wrong, and carry more clout with lenders, easing the acceptance on otherwise unobtainable mortgages. Many brokers negotiate exclusive deals with lenders that are simply not available to individual customers. And if you do it the right way, you can get the advice without paying for it. The advice route The mortgage market is so large and deals change so quickly that a specialist can really make a difference, but beware. All mortgage brokers are not equal. Since 2004, residential-mortgage brokers have been regulated by the Financial Services Authority (FSA). The new regulations are welcome, but not without problems. There are two key questions to ask a broker. “Are you whole of market?” This means “will you look at all the UK’s mortgage lenders to pick the best for me?”. If not, forget it. Unfortunately the FSA left brokers a loophole, allowing some to claim ‘whole of market’ status while offering only a panel of lenders, providing it’s reviewed to include the ‘best deals’ roughly every two months. This is simply not often enough in the UK’s fast-moving mortgage market. 26 Martin’s Mortgage Moment Always check non-broker deals too A few lenders have always not offered their products through mortgage brokers. Yet when the credit crunch hit, more followed suit. Under the regulations, ‘whole of market’ is technically defined as the whole of the ‘available’ market, therefore these don’t have to be included in the comparison, though some brokers will tell you about them. While going to a broker is still the best start point, it’s always worth checking the deals available elsewhere too. Of the major players that don’t offer any deals through brokers, HSBC is often especially competitive, and ING Direct and First Direct are well worth trying too. On top of this, a few companies in the Royal Bank of Scotland Group (NatWest, First Active and RBS), Abbey and Halifax don’t offer all their products via brokers. Ultimately this is a question of how much time and resource you can put in to supplement your broker-suggested best deal… it is worth doing a few checks though. To keep up to date on this visit www.moneysavingexpert. com/mortgageadvice. The more advanced question, “could you, right now, source a mortgage for me from any available UK mortgage lender?” should help cut the wheat from the chaff. “How will you make your money?” Brokers have two sources of income. • Commission. Almost all lenders pay brokers a ‘procuration fee’ worth a whopping 0.3% to 0.5% of the mortgage’s value, rising to 1% for ‘subprime’ mortgages (for people with poor credit). On a £150,000 mortgage that’s £375 to £1,500. 27 • Fees. Brokers may also charge you a fee directly. No reputable broker will charge more than 1.25%, even for ‘sub-prime’ customers. Do not use anyone charging more. Obviously the prime MoneySaving route is to go for a fee-free broker… but if you find someone you like, willing to spend time with you – with a low fee… go for it. Previously fees could only be charged on mortgage completion, now, providing brokers inform you at the outset, they can charge at any point in the process. However, even though it’s legal, you should avoid any broker charging before completion as it can cause problems if things change later. Step 1 Choose a broker. Challenge them for a better deal: you may not need to switch. Discuss your circumstances with the broker. It is helpful if you have a redemption quote from your existing lender. Select a mortgage. The broker should make sure it meets your requirements and that the savings outweigh the benefits. Your broker will make the application to the lender on your behalf. Deduct the costs and work out if it’s worth moving. Valuation and legal work. This should take between 4 and 8 weeks. Completion. Start saving money. Step 2 Step 3 Step 4 Step 5 Step 6 The top brokers There are lots of great local brokers and if you choose them carefully using the questions above, you should get an excellent face-to-face service. On the other hand the big brokers boast of greater market power. 28 Obviously it’s impossible to focus on every broker in the country, so lets stick with the main UK-wide mortgage brokers, Savills, Chase de Vere Mortgages, Charcol and London & Country. All are completely ‘whole of market’ operators. The only difference is in their charges… The Fees-Free Brokers. London & Country mortgages provides a telephone-only service, and as this is cheaper to operate it can afford not to charge a fee, it just earns from the commission. Charcol also offers a free service via Charcol Direct, its telephone only arm; it does also offer face-to-face meetings but here you will pay a fee. Watch out though Charcol’s online service, whilst it’s free it uses a panel of lenders rather than being truly whole-of-market; so you are better off going to it on the phone. Fee-paying Brokers. Both Savills and Chase de Vere mortgages operate face-to-face services and charge a fee. Another option for the financially savvy MoneyBackMortgages.com and MortgageGenie.com have interesting propositions. They don’t give any advice, but process the mortgage you choose through one of these and you’ll get some of the commission it earns as cashback, usually £100-£200 per £100,000 of mortgage. Simply request the mortgage you want from its ready made best buy list and you’ll get cashback. It’ll also try and source cashback on other requested mortgages too. This route’s only for the very money savvy, so be extremely careful, better to get the right mortgage and no cashback than the wrong mortgage with cashback; but know what you want and it’s better than going direct. 29 Martin’s Mortgage Moment Independence and Integrity This guide is sponsored by London & Country mortgages, that’s the reason it is free. You will also see from the text on the previous page that they’re my prime fee-free broker. So let me make something very plain. This guide is written with absolute editorial independence. What’s in it is purely dependent on my view of the best ways to save money and the sponsor’s view on that is irrelevant. However, the reason I agreed to allow London & Country to be the sponsor, which enables this printed guide to exist, is because after detailed research into those brokers that offer coverage nationwide, London & Country has come out as one of the top for each of the last five years. It’s very important that this is understood and no one thinks it is the other way round i.e. that they are being recommended because they sponsor the guide. Like everything with MoneySavingExpert.com, the editorial (what’s written) is purely about what’s the best deal. If London & Country no longer offer the deal they currently do, and either start charging fees or stop being whole of market, I’d ditch my recommendation immediately. You can check if that’s happened via an up to date article on mortgage brokers on the site. Just go to www.MoneySavingExpert. com/mortgageadvice. 30 7 Watch out for the hard sell on... As mortgage rates have become ever more competitive, so some lenders – and brokers – try to make more money elsewhere in the mortgage process. So be prepared for the hard sell on the following…. Higher Lending Charge A Higher Lending Charge (used to be called a Mortgage Indemnity Guarantee Premium or MIG) is an insurance policy which some lenders force borrowers to take out if they are borrowing against a property at a Loan to Value ratio (LTV) of more than 90%. It protects the lender if the borrower defaults on her mortgage and the property has to be repossessed. But Higher Lending Charges are very expensive, and only cover the lender, so are best avoided. As already discussed, people remortgaging tend to have a better LTV than first time buyers, so you may not be affected, but watch out. Mortgage Payment Protection Insurance (MPPI) Sometimes called Accident Sickness and Unemployment Insurance (ASU), MPPI is supposed to cover your mortgage payments if you have an accident or become ill. However, MPPI policies are often expensive and generally have lots of complicated exclusions; for instance, self-employed people are usually not covered and there may be a relatively low maximum pay out. It’s also important to note you may have to wait several weeks before the policy kicks in, and then it will usually only cover your mortgage repayments for one year. Given these restrictions, MPPI may not be suitable for you, especially if your partner’s income or your savings could realistically cover your share of the bills for at least a couple of months. Even if you do decide you want MPPI, you can probably get a cheaper deal by shopping around. For a full article on finding the cheapest see www.MoneySavingExpert.com/mppi 31 Bundled buildings/contents insurance Be very suspicious of deals which insist that you buy your buildings insurance through your lender. While the amount quoted may seem reasonable in the first year, you are then trapped into accepting whatever premium increases they foist on you in subsequent years for as long as the mortgage lasts. Some lenders charge around £30 if you decline to take their insurance. It’s usually worth paying. For a full article on choosing insurance, see www.MoneySavingExpert. com/homeinsurance 32 Life cover from your mortgage seller Would you buy a stereo from the man who cleans your windows? No, so don’t assume just because someone sold you one financial product they will automatically get you a good deal on extra bits like life cover or other insurance. As with MPPI, shop around. In some cases you can save 50% on the life cover offered by your lender or broker. If your personal or medical circumstances have changed you may not be able to get cover at the same price, so occasionally it can pay to stick with an existing policy. But remember to cancel your old policy if you do take out a new one. For a full article on how to find the cheapest cover, see www.MoneySavingExpert.com/mortgagelife 33 8 End thought... Just because you’ve remortgaged once doesn’t mean you should rest on your laurels. Today’s best deal could have tumbled from the best buy tables in six months’ time. If you want to keep saving you need to keep your eye on the ball. In particular, if you’ve chosen a rate for a period of time – say 2 years – then ideally you need to start thinking about moving on a couple of months before your time is up. That’s because at the end of your deal you’re likely to be moved to your lender’s SVR. In most cases this will be worse than your current deal and so you want to be ready to move to whatever you reckon is the best deal for you as soon as possible. Timing is crucial. Don’t let yourself forget and risk squandering the money you saved by remortgaging in the first place. Put a reminder in your diary or in your computer calendar or you can use the free ‘tart alert; reminder services via www.moneysavingexpert.com/tart Happy hunting. I hope you save some money. If you want further information there are further articles on www.MoneySavingExpert.com and you can chat about mortgages in the Mortgage section of the site’s Chat Forum. 34 Notes A word from the sponsor This guide is sponsored by L&C, a leading mortgage broker that provides expert comment and best buy tables for the national press. Unlike many other brokers, L&C charge NO FEE for the advice they give and consider the whole of the mortgage market when they give advice. No Early Repayment Charges If you have no early repayment charges on your existing mortgage or have less than 4 months left to run on your existing deal, contact L&C for FREE advice on 0800 9530598 Early Repayment Charges If you currently have early repayment charges on your mortgage and they have more than 4 months left to run, register for our FREE Mortgage Prompt Service – we will send you an email or a text message 2 months before your current deal is due to expire so you can make arrangements to switch to a new deal at the right time. To register, visit www.lcplc.co.uk and click onto the Mortgage Prompt service. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE Priority Enquiry Form I have the MoneySavingExpert.com Guide to Remortgaging and now would like FREE mortgage advice to see if I can save money! Name: 2nd name on mortgage (if applicable): Address: MLG Postcode: Contact details: Whom do you wish us to contact?: Applicant 1 Daytime Tel no: Your current mortgage: Value of property: Current lender: Interest rate: % Monthly payment amount: Yes No £ £ Amount owed on mortgage: £ Applicant 2 Evening Tel no: (pls tick) Do you have an early repayment charge? If yes — how much is it? Your new mortgage: Are you: Purchasing Amount you wish to borrow: £ (pls tick) When does it end?: / / Remortgaging £ (pls tick) For a term of: London & Country Mortgages FREEPOST SWB 10531 Beazer House Lower Bristol Road Bath BA2 3ZZ yrs Simply send this enquiry form to L&C at: Alternatively, you can fax the form on 01225 442622 or call on Freephone 0800 953 0598 Thank you for your enquiry A L&C adviser will be in touch with you shortly