In order to give homeowners a helping hand in 2015, Aldermore takes a look at how to calculate the true cost of remortgaging.
Are you likely to find a better deal?
Whether homeowners are able to reduce their overall mortgage debt through remortgaging will depend on how their financial situation and the state of the market have changed since purchasing their home.
In particular, those who are in a position to move to a lower loan-to-value (LTV) mortgage could stand to gain. If the value of the property has risen since the current mortgage was taken out, the amount owed will represent a smaller proportion of the overall value, meaning a greater variety of preferable deals with a lower interest rate may be available.
As house prices rose by 8.4 per cent in the year to January, according to the latest figures from the Office for National Statistics, this could apply to a large number of buyers who purchased their house during the recession. The capital in particular has seen prices rise by 13 per cent within a year, though growth has slowed in recent months.
Now could also be a good time to move for those who have reached the end of a fixed-rate term or introductory discount on their mortgage. With inflation at 0.0 per cent in March, experts have suggested historically low interest rates may continue for longer than initially forecasted, meaning many lenders are currently offering highly-competitive mortgage offers.
Finally, for those who have seen their finances increase since buying a home, remortgaging could open up opportunities to increase the maximum monthly payment in order to shorten the life of the mortgage and reduce the total interest to be paid.
Do the benefits outweigh the fees?
If a better deal is available, the next step is to consider whether the additional costs of switching will outweigh the benefits. In particular, those who only have a small amount left to pay on their current mortgage may find that the fees involved in moving to a new contract may be larger than the likely savings.
On the other hand, those in the early stages of their mortgage may find themselves faced with early repayment charges if they are leaving their contract before the end of the initial tie-in period, usually charged as a percentage of the outstanding debt. Similarly, many lenders will charge an exit fee or ‘deeds release fee’ in order to pass over the borrower’s details to their solicitor.
On the other side of the transfer, the new lender is likely to charge an arrangement fee for setting up the new mortgage. This might also be accompanied by a non-refundable booking fee to secure the deal and in some cases lenders will also charge a separate valuation fee to assess the value of the property. Finally, remember to include potential broker charges if using an intermediary to source the new mortgage and also any legal fees for the solicitor who will be overseeing the deal within the overall calculations, if not relying on a legal package included within the remortgage deal.
Alongside calculating the total cost, homeowners also need to decide when each of these fees will be paid. While some must be paid up front, there may be an option to include others within the borrowing total, though this may push up interest rates on repayments.
Having decided to remortgage, the final step is for homeowners to prepare their finances in order to maximise the chance of having an application accepted by the new lender.
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