Is remortgaging now a good idea?
Is now the perfect time to cut the cost of your mortgage? Rates are at historic lows: for the first time a two-year-fix is below 1% – meaning some can cut the costs of their mortgage by £1,000s. Yet many worry about how Brexit affects this – is now the time to do so? So we’re asking our Money Saving Expert Martin Lewis.
My mailbag’s been rammed with messages from nervous mortgage-holders wondering whether they should do anything with their mortgage due to the uncertain economy right now. I don’t have a crystal ball and don’t know what the future holds, but in short here’s my analysis on the situation…
Will fixes get cheaper? The rate at which fixes are set is based on complex 'long-term City swap rates'. And the markets' Brexit gloom has pushed those down, so fix rates could (there's a lot of crystal-ball gazing here) trickle down further.
What about variable rates? This depends mostly on the UK base rate. The drop in the pound would normally see a call for interest rates to rise, but that's balanced against worries about the economy weakening, which would lead to calls to cut them. And indeed Mark Carney, governor of the Bank of England, has just indicated cuts are a possibility. We’ll know in a couple of weeks.
So should people wait?
All that is just educated speculation. The big picture... mortgages are at historically cheap rates already. If you can slash £1,000s off your cost and get peace of mind that you can afford it (and if you're worried about uncertainty, go for a longer fix), then do it. Yes, there's a chance it could get even cheaper, but if you're bagging something that's easily affordable, that safety and certainty has a value too. Playing the market is never a sure-fire win.
And big savings are possible, such as Kperat’s, who emailed me:"Following your email we did some research, fixed at 1.24% for 2 yrs, reduced term to 13 yrs without paying much more a month. Will be saving about £20,000 even after fees. THANKS."
Just how cheap are mortgages?
HSBC is offering a 0.99% two-year-fix, though you’ll need a good credit score, to be borrowing less than 65% of your house’s value and pay a huge fee of £1,499. Yet see this is an example of the type of rates available. At 90% of your house’s value you could get 2.49% fee-free for two years, or if you want to fix for longer, there are five-year-fixes in the 2%s too.
So examine what your rate is now; many people are on their lender’s standard variable rate, the rate you go to when a fix or discount ends. So for Barclays, RBS, Halifax, NatWest and most Nationwide customers, it’s around 4%. And just remember, every 1% point you cut off your mortgage is around £80/month less per £1,000 of mortgage.
How to find the cheapest mortgages
For easy benchmarking, to see what’s out there, start with a comparison site that includes all deals, including ‘direct only’, those that aren’t offered by broker. These include Martin’s ‘Mortgage Comparison’ or sites such asTotallyMoney.com.
Yet it’s not just the rate that counts: these days getting accepted isn’t easy. Both your credit score and whether you’re deemed to be able to afford the mortgage (which is often calculated as if interest rates are far higher than they are, so you can still pay if rates do rise) count. Matching your characteristics to which mortgages are available is something a good mortgage broker can do that you can’t do yourself.
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. Some phone-only brokers such as London & Country Mortgages are fee-free but if you want face-to-face help then ask friends for a local broker recommendation or use Unbiased orVouchedFor to find one.
Don’t ignore the fees
The smaller your mortgage, the bigger the impact of fees, especially on smaller mortgages. 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 (ie, 24-month) deal is £50 a month – add that to the monthly repayment.
Fix or variable rate?
The advantage of a fix is you get price and budgeting certainty that the rate won't move for a set time – variable deals move with UK interest rates (and sometimes just at the provider's whim). Generally you pay a little more to fix, but not much. Ask yourself how much you think rates will rise over the period. If safety's what counts for you, err on the side of fixing, and fixing for longer.
Got savings? They could get you a better mortgage
For this, you need to find your current loan-to-value (LTV) - the proportion of the value you're borrowing: £80k on a £100k property is 80% LTV. At every 5% LTV threshold from 95% down to 60%, deals tend to get better, so a little extra can have a big impact on your rate.
For example, if you've a £150,000 home, and want a £137,000 remortgage, that's 91% LTV, and the top 5yr fix is 4.49%. Yet use £2,000 of savings to reduce the borrowing, and you'd then be at 90% LTV – where the top 5yr fix is 2.84%, saving c. £1,600/year in payments.