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To remortgage or not to remortgage - Jonathan Cornell

To remortgage or not to remortgage, that is the question

Hundreds of thousands of borrowers have a new a new dilemma which has not arisen before. Historically when borrowers fixed or tracker rates ended there was always another one waiting round the corner, so borrowers would either let their mortgage broker find them another deal or they would look around for themselves. Only the very lazy or foolish ever ended up drifting onto their lenders standard variable rate. Well those days are long gone. A couple of years ago remortgages made up about half of the mortgage market. One recent survey suggested that purchases now exceed remortgages by nine to one. So what’s changed?

The main difference for many borrowers is the actual level of the standard variable rate itself. Up until 2008, most standard variable rates were about 2% over the base rate so when the base rate was 5.5% those borrowers who failed to remortgage at the end of their deal ended up paying about 7.5% which was massively higher than other deals which they could secure by remortgaging away to a new lender which was desperate for their business. For many lucky borrowers with mortgages from Nationwide or Cheltenham and Gloucester, they are currently paying a standard variable rate of a mere 2.5% which is actually much cheaper than the vast majority of new deals, so there seems little point in filling out a stack of forms and paying fees to end up with a more expensive mortgage. A major current trend is borrowers overpaying on their mortgages and standard variable rates tend to allow unlimited lump sum reductions, whereas most remortgage deals limit the amount a borrower can repay before they end up paying early repayment charges or penalties.

Not all borrowers have been quite so lucky with their standard variable rates. Northern Rock, which for a long time has been keen to repay the emergency Bank of England loan which it was given to support it in 2007, has been encouraging borrowers to remortgage away and the easiest way of doing this is to charge a higher standard variable rate - its borrowers are paying 4.79% so things aren’t quite so rosy. The rough average of the major lenders standard variable rates is now about 4.2%, a whopping 3.7% over the Bank of England base rate.

However for some borrowers it’s not just about the current level of their mortgage payments, it’s about sleeping at night knowing they can afford to pay their mortgage each month. A large number of borrowers tend to take out fixed rate mortgages, so they know exactly how much is going to disappear from their bank account to pay their mortgage each month. Most fixed rate borrowers whose current deals are coming to end actually find themselves paying less now than they were before. But the benefit of lower payments is tempered by the fear of “what if”. Whilst the Base Rate shows no immediate signs of being increased, no one expects it to remain at its current level of 0.5% forever. At some stage it is going to increase back to its normal level. If it were to increase to 5% and the lenders keep the same margin over the base rate then many borrowers are going to be paying almost 9% on their mortgages. If lenders increase the margin of the standard variable rate over the base rate then some could be paying more than 10%.

Mortgage prisoners

Falling house prices and a reduction in lending volumes have effectively trapped many homeowners with their current lender. Those who took out high loan to value (the size of the mortgage compared with the value of the property) mortgages in the past couple of years have seen their equity disappear substantially and many find themselves in negative equity. Whilst some lenders will allow existing homeowners in negative equity to move home, there are none who allow high loan to value remortgages. So these borrowers become “mortgage prisoners”, a few lenders such as Halifax and Woolwich do allow existing borrowers to choose new rates at the end of their deal so these lucky ones can choose a fixed rate if they need budgetary stability but most don’t do this so borrowers will be stuck until their homes rise in value or they pay enough of their mortgage off.

Many self employed customers with mortgages who took out self certified mortgages, where they did not have to prove their income with payslips or accounts, also face the prospect of staying with their lender until they have sufficient proof of income. In its recent Mortgage Market Review, the Financial Services Authority, has called on lenders to insist on proof of income with every single application and as a result even though this is not yet compulsory, there are no lenders left offering these types of loans anymore.

A substantial number of those people remortgaging run into problems with the value of the property. Most lenders will send round a chartered surveyor to give an independent valuation of the property and these are often much lower than the borrower was expecting (a down valuation). Most homeowners guess the value of their home by comparing it with properties for sale locally. As we know most estate agents will suggest that a property is marketed above its real value to allow for some negotiation downwards by the buyer. However surveyors tend to use values of properties which are sold. For those borrowers with large amounts of equity, a down valuation of 10 per cent makes little difference. For those wanting a mortgage deal which is only available to 70 per cent loan to value, even a small down valuation can mean this deal is no longer available. Lenders cheapest deals are at lower loan to values so going from 68 per cent to 73 per cent loan to value may mean having to pay a much higher rate which defeats the point of remortgaging. Sadly many homeowners only find this out after spending significant amounts on fees.

There are some great remortgage rates available, two-year trackers and fixed rates below 3 per cent, but these are only available to borrowers with substantial amounts of equity (at least 30 per cent) and only for those with a squeaky clean credit record who can prove their income. The best suggestion is to have a chat to a mortgage broker or IFA before you proceed, they will either be able to scour the market for a new deal for you, give you a second opinion on whatever your bank or building society has offered you, or give you the bad news before you spend hundreds or thousands of pounds on mortgage fees.

Jonathan Cornell

Jonathan has been involved in the financial services industry for more than 15 years. He is current working a number of freelance projects, including working part time for First Action Finance as Head of Communications. He has a BA in Economics and an MBA. Jonathan lives in Guildford, Surrey is married and has a one year old son.

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