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Seven deadly remortgaging sins

Published 09th May 2007

Current statistics show that 42 per cent of Brits are paying off a mortgage, so if you’re thinking of shopping around for a new one then make sure you don’t fall into one of the common traps

Remortgaging usually crosses people’s minds when they come to the end of their initial ‘lock in’ period. This is the best way for homeowners to guard against interest rate fluctuations and save on their monthly outgoings, with industry professionals urging all borrowers to review their existing mortgage every year. However, a lot of people get caught up in the process and forget to delve below the surface.

The first assumption borrowers make is that remortgaging is a quick process and will be over and done with in a matter of days. In reality the whole process from start to finish will run into a couple of months. However the myth that remortgaging is overly complex is just that, as it is carried out with minimal hassle.

Switching your mortgage to a different lender will not necessarily free up extra cash. The headline rate or ‘fees paid’ deal may be attractive and appear to save you money, but the corresponding uncompetitive interest rate or extortionate exit fee, early repayment charges, legal fees and new arrangement fee will probably cancel out your potential savings.

If you are thinking about going down the equity release route, make sure you have fully thought it through. Using such a scheme to free up cash by borrowing more money will extend the term of your mortgage. Again, this may seem like a fantastic idea on the surface, but make sure you know how much longer you will be tied in for and avoid a deal which will have you paying more money than your original loan amount back in the long-term.

Another common equity release pitfall is budgeting appropriately to cover this extra debt. You may be close to paying off your mortgage now, but the extra loan taken out to release the money could mean that you’re still paying the money back during your retirement. You need to have an exit strategy and know how you would cope if you find yourself in this position.

In the same vein, the prospect of knocking a chunk off your monthly repayments lures many borrowers in, especially as research from Bradford and Bingley found that people would look around for a new mortgage if they could save around £100 per month. Opting for this type of deal will certainly make the monthly debt more manageable, yet you will be paying it back for longer and the extra interest will increase the total debt.

Right now, the financial climate is increasingly uncertain, especially as far as mortgages are concerned. After the April announcement that inflation had broken the 3 per cent barrier for the first time, it is highly likely that we will see the base rate hit 5.75 per cent before the year is out. This means that homeowners looking to remortgage need to be more than 100 per cent certain that their new deal will not leave them struggling in the event of further rate rises.
Fixed rate deals are currently flying off the shelves in anticipation of the next base rate hike, but borrowers opting for a five year fix must bear in mind that old adage ‘what goes up must come down’. It is all to easy to worry about how far rates will climb, but it is also important to remember that there will come a point when they stabilise or begin to fall and you could end up paying an excessive rate of interest due to your panic buying.

One last remortgaging pitfall is assuming your lender won’t understand. Like most companies with whom you are tied into a particular contract, they will fight to keep you on their books. If it is simply a case of small rate reduction, or a re-jig of the mortgage structure then ask your lender what they would be prepared to do. Most will compromise to keep you.

If you feel that your mortgage is getting a little stagnant and are being tempted by the plethora of ‘better’ deals out there, you need to take a step back. If you are still on a good rate then there is no need to risk the associated penalty fees for a minimal reduction in the headline rate, you could be better off in the long run for sticking.

Andy Wiggans, director of mortgage products at Bradford and Bingley advises: “The key thing is for borrowers to ask themselves what they are remortgaging for and what is likely to happen in the future – purpose is key. Only then when they have done their research, should they go and speak to a mortgage adviser.”
By Ariane Buteux

Source: ' Personal Finance & Savings '

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