Once an initial fixed rate interest term on your mortgage has ended, the lender usually increases the interest rate of the mortgage drastically. This rate is known as the Standard Variable Rate (SVR). In some cases, people end up paying lenders up to £50, 000 in interest when they stick to the same SVR. The SVR varies from lender to lender- some providing better deals than others- hence it is important to research your options and comparing interest rates with different lenders before proceeding with your application. People often remortgage their properties because they find a lender who will provide a lower rate, hence saving them a lot of money- although there are minor costs when changing mortgage providers.
Leaving My Current Mortgage Provider
Early Repayment Charges
In the case that a borrower wants to repay a sum of their mortgage early, lenders charge a fee for the repayment. This is often referred as an exit fee or early payment charge (EPC). Repaying a sum of the mortgage earlier than expected is considered as the borrower breaching the terms of the contract, and so an EPC is a penalty which reimburses the lender for the amount of interest they would lose for the earlt repayment. An EPC is usually a percentage of the loan amount, which changes depending on the stage of the deal the borrower is in and also varies from lender to lender. The percentage would usually descend as the deal goes on.
Before making an early repayment, it is always best to weigh out the costs of the transaction, by comparing the EPC amount and the amount of interest you would be paying if you were to continue making regular payments. It is always worth considering the option of remortgaging at this point as it could decrease the costs of an EPC and also save you money by getting lower interest rates.
EPC’s can be as high as 5%, which is a huge amount of money to repay. If you choose the repay a sum of the mortgage early, there are 2 options to consider:
-Paying the cost upfront
– Increasing the mortgage amount from the new lender, which would essentially take care of the cost. But keep in mind that this will be committing you to a more expensive mortgage deal, because your loan amount will increase.
A possible way to avoid this fee is by ensuring you complete your current mortgage term before the new remortgage term is to be completed, which is essential to prevent being out of pocket.
Deeds Release Fee
A deeds release fee (also known as an admin fee) is used as a payment for your current lender to give your conveyancing solicitor access to the title deed for your property. Although there is no interest related to the admin fee, it still contributes to the cost of remortgaging a property. You would usually pay the admin fee during the initial stages of the mortgage application, however, in the situation that you are leaving the initial mortgage deal, the fee is to be paid at the end. The amount to be paid is found in the KFI (Key Fact Illustration), mortgage offer or any of your original paperwork regarding the mortgage.
What Would a New Lender Charge Me For?
The arrangement fee (also known as an application fee, product fee or booking fee) is the highest price out of the fees charged by a lender. It essentially reserves the product of the mortgage and covers the cost of the lender for providing the application. Unlike the deeds release fee, it includes the interest rate of the mortgage as it is commonly added to the price of the loan, although you could pay it upfront. However, the risk that comes with paying the arrangement fee beforehand is that if the application falls through, there is a chance that you will lose this money.
1. Should I always try to get the lowest interest rate?
Some lenders will try to lure you into paying higher fees as it can make the small interest rate look appealing in comparison. However, it doesn’t always weigh out to be the best case. As always, it is best to calculate which product may be more suitable, and cheaper in the long run.
2. What is the best fee and interest rate arrangement?
Usually, when it comes to mortgages, the initial fees are either low with a high interest rate, or high fees with a low interest rate. The best option varies based on the size of the loan you require. For example, lower fees often suit a smaller loan as less interest could be paid in general. Where as larger loans work well with lower interest rates since the mortgage would outweigh the fees drastically.
The Valuation Fee
When applying for the remortgage, the property is required to have a valuation (or survey) to estimate its current value. This is done so that if mortgage payments are not maintained, the lender has the right to repossess the property. Also, finding out the value ensures that the lender can cover the costs of the mortgage whilst making some profit on the side. Some lenders will cover the fees of the valuation for you, although this is not always the case. If you are required to pay the valuation fee, it can cost between £300-£500, depending on the conveyancers, the properties estimated value, location and many other factors. With a remortgage, it is not necessary to pay fees for surveying the structure, nor a homebuyer’s report, making it the only surveying fee.
The valuation fee is often paid at the same time as the deeds release charge and the application fee at the initial stage of the mortgage.
The Conveyancing Fee
You will need a legal representative when switching from one mortgage provider to another, or in other words, a conveyancing solicitor.
Free legal representatives usually come as part of the mortgage package, so there is no fee to pay, however, without a lender receiving extra funds to employ them, they are generally paid a low wage. This can be very demotivating, and can result in low work production and a lengthy wait for results.
When you are removed or added to a mortgage via a remortgage deal, extra procedures have to be carried out (like providing extra documents to prove significant fund changes to a mortgage). For this, your conveyancing solicitor must be informed and there is a fee of around £300 for the conveyancing, to be paid upfront.
Should I Use a Broker?
Some brokers charge a fee for your remortgage, others might do it free of charge because they will get a commission from the lender for your case. For remortgages, it is wise to use the services of a broker to prevent anything going wrong during your remortgage procedure in two ways : Firstly, they can widen your opportunities when choosing a lender as some lenders only go through mortgage brokers to finance remortgages. They can also help you save money in the case that the transfer does not go though.
Brokers can be paid 2 ways- either with a fixed charge, or based on a small percentage of the loan. In some cases, brokers may ask for a lower fee depending on the amount of commission they receive from the lender for recommending their product. Its worth discussing this with your broker before proceeding to make any payments. Few brokers ask to be paid before the mortgage offer is given, which is not advised as it could mean you lose your fee if you decide to use a different broker.
To Sum It Up
Remortgaging is a sensible way to save yourself from paying higher interest rates over a long period of time, however you should always calculate and consider the fees involved to ensure you have made the right decision. Before making a final decision on what lender to transfer your mortgage to, and what product to use, its best to do some comparisons into the different options available, and the calculations of the costs involved.
When taking out any form of finance, always ensure you can cope with the costs and are prepared for any situation which might come about unexpectedly.