Remortgage Pros and Cons

Remortgage Pros and Cons.

With news this week from the Citizens Advice Bureau that nearly 1 million homeowners may face mortgage difficulty when coming to repay their mortgage as they are on interest only loans, we thought it pertinent to raise the pros and cons of remortgaging.

The Governor of the Bank of England, Mark Carney, has already stressed that interest rates will rise in the New Year and given that there are also around 1 million interest rate increase "virgins" i.e.  people who have never experienced an interest rate rise given that Bank of England base interest rates have been frozen at 0.5% for many years, there are concerns that a combination of interest rate increases and those with interest only mortgages could face financial hardship and an increase in repossessions.

Remortgage tips

Always talk to your existing mortgage lender first as they may be able to offer you a cost-effective remortgage.  This is because you will have no need to employ solicitors or mortgage brokers or pay additional fees to any new mortgage lender in survey fees or application fees.

Expect any remortgage with either your existing lender or a new lender to have tougher affordability criteria.  The mortgage market review (MMR) started in April 2014.  This placed tighter lending criteria on mortgage companies and brokers whereby they are now required to not only test whether you can afford a mortgage today but also stress test to check that you can still afford the mortgage payments if there are increases in interest rates and general day-to-day living expenses.

Ask your mortgage broker to complete a quick search of the mortgage market to compare what is available on the open market versus terms offered by your existing mortgage lender.  It is then that you can balance up the cost of remortgaging with a new lender instead of remaining with your existing lender.

Interest only trap

Make sure you have a plan to repay your mortgage.

Most lenders will convert interest only mortgages to a repayment mortgage at the "flick of a switch".  Ask your lender how much the monthly payments will be to convert to a repayment mortgage.  If this is not affordable ask your lender for a part conversion to a repayment mortgage.

Some lenders will not allow a conversion to a repayment mortgage.  In these circumstances we suggest you ask them if there is a facility to make overpayments.  It is common practice for many lenders to allow at least an overpayment each year of 10% of the capital balance at the start of the year.

By making overpayments, even if you remain on an interest only mortgage, it will get you used to making higher monthly mortgage payments from a budgeting perspective.

The power of overpayments

We have recently issued a video guide which illustrates the power of overpayments.  Look at your budget, look at your bank statement to see exactly where you are spending money.  There may be luxury items that you can make cutbacks with such as your mobile telephone, Internet subscriptions and satellite/cable television subscriptions.  How many takeaway do you order each month? How often do you drink? Do you pay for things that you rarely use?

A storm is brewing

Many of us over 40 years old will remember the period of exceptionally high interest rates in the late 1980s where some mortgages had interest rates of 15% and 16% per annum.  For those who have mortgages but are in their 20s or 30s you may not remember this.  We are not saying that the high interest rates of the late 1980s will return but interest rates on average over the last 100 years have been in excess of 7% and 8% so you must prepare for higher rates.

Please do not ignore our warning, look at your budget, make overpayments and consider protecting yourself by remortgaging to a rate that is affordable today before interest rates rise and you end up remortgaging onto higher rates over the coming years.  Contact us for a quick, free remortgage comparison search.