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If your fixed rate mortgage is nearing its end date, you might be wondering when’s the best time to review it, or perhaps you are considering switching to a new deal mid-way through your current deal.
When it comes to deciding when to consider remortgaging, it really depends on your own circumstances.
This guide has all the information you need to figure out when the right time is for you to review your mortgage.
What is an early repayment charge?
An ERC, or Early Repayment Charge, is a fee that some mortgage lenders impose if a borrower repays their mortgage before the end of the agreed term. ERCs are typically calculated as a percentage of the outstanding loan balance, ranging from 1% to 5% or even higher, depending on the lender and the specific mortgage agreement.
Remortgaging at the end of your fixed-rate term
If your mortgage product term is coming to an end, we recommend taking a look at your options at least 6 months before your deal ends. Most mortgage offers are valid for 6 months, so you can actually arrange a new deal in advance to avoid paying early repayment charges. This way, you won’t miss out on getting a great deal, and you won’t have to wait until your existing deal ends to switch.
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Advantages of reviewing your mortgage 6 months in advance of the existing deal ending
Hedge your bets
Applying for a new mortgage at the earliest opportunity when your current one is coming to an end allows you to reserve the best interest rate available at that time. If interest rates increase, you’ve locked in a deal that’s valid until your existing one ends, and you’ve made a savvy move by reserving early.
On the other hand, if interest rates come down after you’ve applied, you can often switch to a new lower rate with most lenders, or even consider switching to a different lender if they have a better deal. It’s like having the best of both worlds – you’ve got options to adapt to the changing market and secure the best deal for yourself. Way to be proactive and smart about it!
Avoid going onto the standard variable rate
If you leave remortgaging and switching lenders too late, you may risk being transferred to the standard variable rate (SVR) of your existing lender once your current mortgage deal expires.
This can result in higher monthly payments, as SVRs are typically higher than the rates offered on fixed or discounted mortgage deals.
It’s important to plan ahead and allow sufficient time for the remortgaging process, taking into consideration potential delays or complications, especially in more complex transactions such as the transfer of equity or Help to Buy schemes.
Starting the process early and being proactive can help you avoid being pushed onto the SVR, which could result in increased costs.
Leaving your fixed-rate mortgage deal early
Remortgaging away from your current lender can make sense in several situations.
Switching to a more favourable deal
A common reason is to take advantage of more favourable terms or interest rates offered by another lender. By shopping around and comparing different mortgage deals, you may find a better offer that suits your financial needs and goals.
When considering remortgaging mid-way through an existing mortgage deal, it’s important to carefully assess the costs involved, including any early repayment charges (ERCs) or exit fees from your current lender, as well as other costs associated with remortgaging, such as arrangement fees, valuation fees, legal fees, and other charges. These costs should be compared to the potential savings or benefits of remortgaging, such as obtaining a lower interest rate, more favourable terms, or accessing additional features or benefits.
Example
- £300,000 mortgage
- Current rate – 5%
- 3 years remaining on current deal
- 25 year term
- 3% ERC – £9,000
- £1,754 per month
- New deal – 2.5%
- £999 arrangement fee
- New payment – £1,346 per month
- £408 monthly saving x 36 months = £14,688 minus £9,999 (arrangement fee and ERC)
=Total saving £4,689
Current lender no longer suitable
Another reason for remortgaging could be if your current lender does not cater to your new requirements. For example, if you need to borrow additional funds for home improvements or to consolidate debts, and your current lender does not offer such options, you may choose to remortgage with a lender that can provide the necessary financing.
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Switching from a tracker or variable to a fixed rate
Remortgaging from a tracker or variable rate mortgage to a fixed rate mortgage is one potential reason for leaving your existing mortgage deal early. This could be motivated by a desire to lock in a fixed interest rate to provide stability and certainty in your mortgage payments, especially if you expect interest rates to rise in the future.
Tracker or variable rate mortgages typically have interest rates that fluctuate with an external benchmark, such as the Bank of England base rate or the lender’s own variable rate. These types of mortgages often have little or no exit fees or early repayment charges, which can make it more feasible to switch to a fixed rate mortgage without incurring substantial penalties.
Change of occupancy status
If you are switching between a residential mortgage and a buy-to-let mortgage, or vice versa, it may require an early remortgage or refinance. This is because residential mortgages and buy-to-let mortgages are different types of loans with distinct terms and conditions, and they are subject to different regulations and requirements.
Fees to consider when remortgaging
Yes, when remortgaging, there are several fees to consider, including:
- Arrangement fees: These are fees charged by the lender for setting up a new mortgage deal. They can vary widely, ranging from a few hundred to a few thousand pounds, and may be payable upfront or added to the mortgage balance.
- Broker fees: If you use a mortgage broker to help you find and arrange a new mortgage deal, they may charge a fee for their services. Broker fees can vary, and it’s important to clarify with your broker upfront what their fees will be and when they are payable.
- Valuation fees: Many lenders require a valuation of the property as part of the remortgage process to assess its current value. Valuation fees can vary depending on the property’s value and the type of valuation required (e.g. basic valuation or more detailed survey), and may be payable to the lender or a third-party valuer.
- Conveyancing fees: Conveyancing fees cover the legal work involved in transferring the mortgage from one lender to another. These fees can include solicitor or conveyancer fees, land registry fees, and other disbursements, and can vary depending on the complexity of the transaction and the conveyancer’s rates.
- Early Repayment Charges (ERCs): ERCs may apply if you are repaying your existing mortgage before the end of the agreed term. ERCs can vary depending on the lender and the specific mortgage agreement, and can be a significant cost to consider when remortgaging before the end of your current deal.
It’s worth noting that some lenders may offer incentives to attract new customers, such as free valuation or conveyancing services. However, it’s important to carefully review the overall costs and terms of the new mortgage deal, including any incentives, to ensure it is the best option for your individual circumstances.
Reasons for remortgaging
- Home improvements: Remortgaging to release equity and fund home improvements or renovations.
- Debt consolidation: Consolidating existing debts, such as credit card or loan debts, into a new mortgage to potentially lower overall monthly payments.
- Cheaper deal: Remortgaging to switch to a new mortgage deal with a lower interest rate, potentially reducing monthly payments and saving on interest costs.
- Change mortgage type: Switching from a variable rate to a fixed rate, or vice versa, to better align with financial goals or changing circumstances.
- Adding or removing a partner: Remortgaging to add or remove a partner from the mortgage, for example, due to marriage, divorce, or changes in ownership.
- Release money to buy another home: Remortgaging to release equity to use as a deposit for purchasing another property, such as a second home or investment property.
Reasons not to remortgage early
- Rate currently lower: If the current mortgage interest rate is already lower than what is available in the market, it may not be financially beneficial to remortgage early and incur fees for a new deal.
- High exit fees and other fees: If the exit fees, arrangement fees, valuation fees, conveyancing fees, and other costs associated with remortgaging are too high, it may outweigh the potential savings from a new deal.
- Planning to sell the property or redeem the mortgage: If you are planning to sell the property or redeem the mortgage in the near future, it may not be worthwhile to remortgage early as you may not have enough time to recoup the costs associated with remortgaging.
- Reverting to standard variable rate for flexibility: If you value flexibility in your mortgage, such as the ability to make overpayments or pay off the mortgage early without incurring penalties, you may prefer to stay on the standard variable rate (SVR) instead of remortgaging to a fixed rate deal which may have restrictions on early repayments.
Remortgage with the same lender
Remortgaging with the same lender is usually quicker and easier than switching lenders and doesn’t involve conveyancers and, in most cases, no valuations. However, you may not get the best deal available if you don’t shop around.
When choosing a new deal with the same lender, they usually have a desktop valuation on file of what they believe your property to be worth. It usually takes no more than a couple of days to get an offer, and you can usually reserve a rate 3-6 months in advance of your deal ending.
Remortgaging to a new lender
When switching to a new lender, it involves conveyancers and surveyors, and can take several months. However, by shopping around on the whole of the market, you can ensure that you are not missing out on potentially more favorable deals.
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What happens if I don’t remortgage?
If you don’t remortgage, you will usually revert to the lender’s standard variable rate, which is usually significantly higher than the initial deal.
What mortgage deals are available when remortgaging?
When remortgaging, there are several options available, including:
- Fixed rates: These mortgages offer a fixed interest rate for a set period of time, providing certainty and stability in monthly repayments.
- Tracker mortgages: These mortgages have an interest rate that tracks an external benchmark, such as the Bank of England base rate, and can go up or down in line with changes to that benchmark.
- Variable mortgages: These mortgages have an interest rate that can change over time, typically influenced by the lender’s discretion or market conditions.
- Capital repayment mortgages: These mortgages involve paying both the interest and the capital amount borrowed, resulting in full repayment of the mortgage by the end of the term.
- Interest-only mortgages: These mortgages involve paying only the interest on the loan, with the capital amount remaining unchanged throughout the term. Repayment of the capital is required at the end of the term.
Conclusion
The best time to remortgage will vary depending on your individual circumstances and the available options. However, to avoid early repayment charges, it’s generally recommended to start reviewing your options around 6 months before your current mortgage deal ends.
This allows you sufficient time to research and compare different deals, including interest rates, fees, and terms, and make an informed decision on whether to remortgage or not. Keep in mind that market conditions, your creditworthiness, and financial goals should also be considered when determining the best time to remortgage.
For more info on remortgages, please contact a member of the Strive team, by emailing [email protected] or call us on 01273 002697.
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Jamie Elvin
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