How to remortgage your home
A remortgage is when you change your old mortgage for a new one, without moving home. Because of the credit crunch, it's hard to get competitive remortgages at the moment. Yet remortgaging can still yield large savings.
This page is a resource guide on how to refinance your home despite the recession.
What you should do before you remortgage
Most people remortgage when their existing mortgage deal comes to an end and they will incur interest rate rises if they stay with their curent lender - e.g. people who took out the Halifax tracker of 0.51% below the base rate in 2007 will find their payments jump to 3.5% when the deal ends. Others remortgage because they fear interest rates will rise in the future and wish to fix their rate before that happens: bank base rates in the UK are currently 0.5%, but are likely to rise in 2012 when the recession ends.
1. First check the terms of your existing mortgage to see if the lender will charge a redemption penalty if you remortgage. In some cases, the saving from remortgaging is so great, it's worth paying the penalty. In other cases it's not worth bothering.
2. If you are on a current deal, check the standard variable rate that your mortgage will revert to once the deal ends.
3. Also check if you are allowed to make overpayments on your existing loan. Usually overpayments are restricted while you are in the special deal period and unlimited outside the deal period, but some lenders apply restrictions to overpayments long after the initial special rate has ended.
4. Finally, you need to check the value of your house and the amount of equity there is in it. You can use the FT's mortgage equity calculator for a rough guide to what your house is worth. You can also ask an estate agent to value your house for you. The equity in your house is the current market value of your home less the outstanding mortgage. Please note that when you remortgage, the lender will get a surveyor to value your home and the valuation they provide will probably be lower than that an estate agent will quote (surveyors are always conservative in house price crashes).
Looking for the best remortgages
Armed with the above information, you then need to find the best remortgage deal that will save you money. There are mortgage comparison sites (but note that some of these are incomplete and will not quote all the deals available - this is because they get paid commission for everyone they introduce and some of these sites deliberately exclude the low paying deals). You can also use the best buy tables in most quality newspapers or use a mortgage broker. Sometimes the best way to find mortgage deals is simply to sit in front of your computer one weekend and trawl through the websites of the main lenders.
Because of the credit crunch, mortgage providers are reserving their best deals for those with a low loan-to-value (which is tough especially when house prices are falling, shrinking the equity in people's homes). Therefore it is imperative you get the capital outstanding down. If your existing mortgage allows you to overpay without penalty, start doing this immediately, while you look for a new mortgage. If you have savings beyond the six months emergency money everyone should keep, consider using the surplus to overpay your existing mortgage (or use it as a part redemption when you are remortgaging so that your new loan-to-value is lower).
There are some very good remortgage deals out there that are only offered to existing customers of the bank or building society. In these cases, it might be worth opening savings accounts or current accounts with the lender you hope to borrow from. You will need to plan ahead here, try to open the accounts a few months before you approach them for a mortgage.
Also make sure your credit report is spotless. Make all your debt payments on time. Be aware that lenders will be trying to manage risk by looking at your overall debt obligations. You can help yourself by paying down credit card debt and reducing the number of cards you have. They like debt obligations to be no more than 35% of your income. If your existing payments are more than this, they will probably decline you as too risky.
The other thing to bear in mind is that lenders have sharply increased their arrangement fees, which now range from £299 to £1999.
When assessing the remortgage deal, add any mortgage redemption penalty you will incur when you end your old mortgage to the arrangement fee on your new mortgage. Then ask yourself how long the savings in interest rate on your new mortgage will take before you break even.
As things stand, most people won't benefit from remortgaging. Your next strategy is to overpay your existing mortgage as much as possible if your contract allows it, and simply wait till lenders bring down their arrangement fees. Lenders can only make profits by lending, and once they have got over the current crunch, they will start to get competitive again.
How long do you have before interest rates start to rise again? Central banks tend to raise interest rates if they think inflation might rise - and it's rising. Therefore keep a close eye on the Retail Price Index and the Consumer Price Index. As soon as they begin to turn upward again, it is likely that interest rates will rise again. The current ultra-low bank base rates are unprecedented. if you are lucky enough to be on a very low tracker or standard variable rate, use the savings freed up by rate cuts to overpay your mortgage as aggresively as you can so that when you finally remortgage, you get a double benefit of a low fixed rate and a low loan amount. The credit crunch recession ended in 2009, but it looks like we might be heading into another recession. So there's a dilemma as to whether the central bank will raise rates - but err on the side of caution and assume they will.
Starting in 2014, new lending checks have been mandated by the Financial Services Authority.
Lenders have to look at overall ability to pay. It's reported that some lenders are even quizzing potential borrowers about their restaurant habits. Therefore make sure you are squeaky clean before you apply. Also note, there will no longer be self-certified mortgages - so if your existing mortgage is a self-cert one, it may be best to stay put .
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