This week’s announcement that National Insurance will rise next year, along with rising gas bills and inflation expected to increase over the next few months, many households will be looking for ways to reduce their monthly outgoings. For homeowners coming to the end of a fixed rate mortgage deal, or whose deal has already ended, choosing the right remortgage deal can help to save them money.
Right now a rate war between mortgage lenders is raging, which has seen many lenders slash the rates on their remortgage deals to record lows. In fact, at the moment there are 41 two year fixed and 18 five year fixed remortgage deals that offer a sub-1% rate. While the most competitive deals are often only available to those who own a high amount of equity in their home, usually 40% or more, the rate war has trickled down the rest of the mortgage charts so that competitive rates are now available to those who own less equity in their home.
With rates competitively low, locking into a new mortgage deal, or moving from a lender’s standard variable rate (SVR) and onto a new deal, could substantially reduce repayments. For example, the currently average SVR is 4.41%, which would mean that a homeowner with a property valued at £300,000 and who has a mortgage of £180,000 on a 20 year term would be making monthly repayments of £1,130.04. If this same homeowner remortgaged onto the current lowest two year fixed remortgage rate of 0.84% they would be making monthly repayments of £815.03 – £315.01 less per month.
While locking into a lower mortgage rate will likely impact repayments, when looking to save money on their next remortgage, homeowners should also consider how much they are being charged on product fees. Some lenders will offer deals without charging any product fees, while other deals can have product fees of £1,500 or more. If a lender does charge a product fee on a deal, they can either require the fee be paid upfront or add the fee to the mortgage loan, which will increase the mortgage loan and, subsequently repayments. As such, homeowners may want to consider choosing a deal that has a low product fee, or none at all, even if the actual rate is slightly higher than a deal with a high product fee.
Another way homeowners can save money on their next remortgage deal is by choosing a deal that has the incentive of free valuation and legal fees. Again, having to pay for a valuation and legal fee can increase the cost of remortgaging by hundreds of pounds. Fortunately, many lenders are offering the incentive of free valuation and legal fees on their most competitive deals, but homeowners may want to check that these are included before proceeding with the remortgage.
During the last 18 months, consecutive lockdowns have resulted in some consumers being able to save more than they normally would and with savings rates remaining low, it may be a better option for homeowners to use their savings to pay off a lump sum of their mortgage than keeping it in a savings account.
When locked into a mortgage deal, many lenders that allow overpayments still charge a fee if borrowers pay off a lump sum of their mortgage, however these fees often do not apply once the deal has ended. As such, borrowers with a lump sum of money that can be used to repay part of their mortgage may find that when locking into a new deal is the best time to make a lump sum repayment.
As well as this, making a lump sum repayment on a mortgage usually increases the equity the homeowner has in their home, which can result in them being eligible for more competitive mortgage rates. Even if the homeowner cannot get a better deal through increasing the equity they own in their home, paying off a lump sum of their mortgage can help to reduce their monthly repayments.
Taking the example above where the homeowner owns a £300,000 property and has a mortgage of £180,000. If this homeowner is planning to lock into the two year fixed deal at 0.84% and has £10,000 in savings that they can use to make a lump sum repayment – reducing the mortgage from £180,000 to £170,000 - they can reduce their monthly repayments from £815.03 to £769.75 – a reduction of £45.28 per month and a total of £1,086.72 over the two year period. Meanwhile, if the homeowner kept the £10,000 locked into the top paying two year fixed rate bond, which currently comes from Al Rayan Bank paying an expected profit rate of 1.76% AER, this would result in them earning £355.10 in interest over the two year period – significantly less than the savings that can be made by reducing the mortgage repayments.
When remortgaging there are clearly many ways homeowners can reduce their repayments and save money, however the options available to borrowers depend on their personal financial circumstances. As such, it may be worthwhile for homeowners to speak to a mortgage broker first who will be able to provide advice tailored to their individual needs and who will be able to highlight the best options and deals available as a result.
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