Remortgage and save money

Many people are reluctant to switch to a fixed rate because there's often a premium to pay, but are they making a mistake?

The mortgage market has become increasingly competitive in 2010 -- and about time too. After the dismal decimation of products and lending in 2008 and a rather stagnant 2009, 2010 has seen lenders really get the bit between their teeth and show an appetite to lend again.

OK, so it’s not like the good old days (or bad old days) but lenders have at least been competing for business this year, and not just for the low-risk remortgage deals either. First-time buyers have been getting a bite of the cherry too with a significant increase in products tailored for them.

Indeed, according to financial information provider, Moneyfacts, all the conditions are currently present for a buoyant mortgage market.

Vital signs present

It notes that mortgage rates are currently being cut, lending criteria is steadily being loosened and product availability is improving. For example the average two-year fixed mortgage rate has fallen to 4.61%, its lowest level in 15 months. Average three- and five-year fixed rates are also on the decline, at 5.30% and 5.74% respectively.

But Moneyfacts suggests that while this appears to be a perfect platform for resurgence in the struggling mortgage market, it looks as if there is still little incentive for borrowers to commit to a new deal.

Why not?

Better off on Base Rate

With Base Rate still at 0.5% many borrowers’ ‘revert to’ rates are still very competitive compared to what they could refinance to. Large lenders like Lloyds TSB, Cheltenham & Gloucester and Nationwide, for example, all have SVRs of 2.5% for borrowers who have been with them for a couple of years. That’s a lot of borrowers defaulting to a very cheap rate indeed. In other words, for many people it still feels like it’s not worth remortgaging.

If you took out a fixed rate mortgage two years ago for example you could save a significant amount of money by simply defaulting to your lender’s SVR now.

According to Moneyfacts the average two-year fixed mortgage rate in May 2008 was 6.59%. Reverting to the current average standard variable rate of 4.66% on a £150,000 mortgage would save homeowners £164.38 per month. Those fortunate enough to revert to a low standard variable rate of 2.50% would save £330.18 per month.

So if the rate you will automatically revert to is cheap and cheerful, why would you want to waste the time switching, not to mention the switching costs, including an average arrangement fee of £933?

Indeed, if you have very little equity in your property (less than 25%) there is even less incentive to switch, because the new deals available to you will be far less attractive than those on offer to borrowers with 25% equity or more. In which case staying on your lender’s SVR or default tracker rate will look even more appealing.

But for some borrowers remortgaging could really make sense.

Time to switch?

If you have a lot of equity in your home it’s possible that the new deals currently on the market could beat your lender’s SVR. After all, the average SVR is 4.66% and there are plenty of new deals for those with 25% equity or more that are significantly cheaper.

There are tracker deals available from less than 2.5% and even fixed rates can be found at sub-3%. For example Yorkshire Building Society has a 2-year tracker available to those with at least 25% equity at 2.39% (Base +1.89%) -- now that beats any SVR.

And if you want the safety of a fixed rate you could opt for Market Harborough Building Society’s two-year fixed rate at 2.95%, for which you only need 20% equity.

Both deals above come with a fairly standard £995 fee.

Safety first

By taking a cheap fixed rate now some borrowers could actually pay less than they would on their lender’s SVR (depending on which lender they are with), plus they get protection from rising interest rates for the duration of the fix. What’s not to like?

OK, realistically many borrowers will still have to pay a premium to fix, either because they are with a lender with a particularly cheap revert to rate, or because they don’t have enough equity to benefit from the cheapest fixed rate.

Is it a price worth paying to know that your mortgage repayments are set in stone for an agreed period?

Well, that all depends on what happens to interest rates and your attitude to risk. Of course, rates could stay low for another two years or more, making SVRs very appealing indeed. It is certainly widely accepted that rates are most likely to remain low for at least the rest of this year.

But after that is anyone’s guess and you need to work out at what level a tracker would become unaffordable for you. If you know you have the flexibility to manage your repayment even if rates rose by three per cent, perhaps you can take the chance on a tracker in order to bag a low interest rate now.

But if you know that a 1.5% increase in Base Rate would be completely unaffordable for you, and you can find a fixed rate for less than that, it could be worth opting for the safe option. It’s nobody’s decision but yours of course, and it’s completely dependent on your own financial circumstances.

But don’t automatically dismiss remortgaging as an option. It could save you money, give you security, or even both.

Top fixed rate remortgages

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.

This article aims to give information, not advice. Always do your own research and/or seek out advice from an FSA-regulated broker (such as one of our brokers here at lovemoney.com), before acting on anything contained in this article. 

Finally, we tend to only give the initial rate of a deal in our articles, but any deal which lasts for a shorter period than your mortgage term will revert to the lender's standard variable rate when the deal ends. Before you take out a deal, you should always try to find out from your lender what its standard variable rate is and how it will be determined in the future. Make sure you take all this information into account when comparing different deals.