Find the Best Mortgage
Independent Mortgage Advice
Move Mortgage, Switch Supplier - and Put Pounds in Your Pocket
In the second part of our series on how to save thousands of pounds a year JENNIFER HILL details how to remortgage, and find good deals on phone, gas and electricity.
FOR most people, buying a property is the biggest financial commitment they will make. Soaring property prices mean the cost of bricks and mortar has never been so high in relation to earnings.
The average salary of full-time workers in the UK stands at around £25,000. Average house prices across Scotland have risen for 18 successive quarters - up 2.6 per cent in the last three months alone and a huge 19.5 per cent in the past year - to almost £130,000. This means property prices here are more than five times average earnings.
On top of these mammoth costs, many homeowners are also paying through the nose with uncompetitive mortgage deals. As many as 30 per cent of UK mortgage borrowers are effectively turning down a 10 per cent pay rise - or £2,400 - by not remortgaging away from their lenders' standard variable rate (SVR).
An average borrower with a £100,000 mortgage who is paying a typical SVR of 6.5 per cent could save £4,440, after allowing for fees, by moving to a competitive two-year fixed-rate of 4.28 per cent. This is equivalent to pre-tax earnings for a basic-rate tax-payer of £4,813 - or £2,407 per year, says mortgage broker John Charcol - equal to a 9.63 per cent pay-rise. "No matter how many times consumers read about the savings they could make, they will still sit on their hands and do nothing. If someone told me I was turning down a 10 per cent pay rise, I'd do something about it," says Drew Wotherspoon, a mortgage broker. He stresses that there is a misconception that remortgaging takes a long time and is riddled with problems: "The process is relatively painless and should not take more than two hours of a borrower's time. Put that another way: you're earning £2,407 an hour."
Those sitting on an SVR can expect to reduce their annual interest rate by at least 2 per cent by remortgaging. Those with a £100,000 mortgage who track down a deal 2 per cent lower will save around £166 per month. With the Portman Building Society's market-leading two-year fixed-rate recently reduced to 4.2 per cent, the monthly saving could climb to almost £200. "There's little reason for anyone to be paying their lender's SVR," says James Cotton, a mortgage specialist at London & Country Mortgages. "Even if you can easily manage your current monthly payments, it's still worth switching. If you move to a lower rate that allows overpayments, you'll start paying off your mortgage early. By paying an extra £100 per month, someone with a £100,000 repayment loan over 25 years could save more than £18,000 in interest and cut their mortgage term by seven years."
So, how do you go about it and what sort of deal should you look for? First, check with you lender if they levy any penalties for early redemption. If you will be hit with charges for switching, do your sums. These costs might erode - or completely eliminate - the potential savings.
Find out if your existing lender will offer you a better rate. Factor in any fees they will charge, then compare the result with the rest of the market.
Product comparison services, such as Moneyfacts, Moneysupermarket and Moneyextra, can be invaluable. Specialist mortgage brokers can also prove useful. They could get you a better deal, but be aware they might charge a fee.
There are hundreds of different mortgages to choose from. Deciding on the type can seem bewildering.
"Looking for a suitable mortgage is no mean feat: there are various elements you must consider before making the leap," says Louise Cuming at moneysupermarket.com. "Determine which elements of a product type hold the most value for you."
Those who have stretched themselves to the limit in borrowing, for example, could be well advised to opt for a fixed rate. These give the peace of mind that your monthly repayments will remain the same.
Homeowners with irregular additional income (such as commission or bonuses) or the self-employed should look for a flexible discounted product that allows overpayment, underpayment and payment holidays. Savings on discounted variable rates have reached their highest in over a year, surpassing two and three-year fixed-rate deals, according to the latest index from estate agency Your Move. A higher-rate taxpayer, though, with a large monthly income and healthy savings might find an offset mortgage - where savings are offset against mortgage interest - the most efficient. Whatever type of loan you go for, beware redemption penalties that extend beyond the offer period. Some lenders offer very low interest rates, but tie you into an uncompetitive SVR for years afterwards.
Also avoid deals that come with a compulsory mortgage indemnity guarantee (MIG). Though it sounds like a favourable feature, it is effectively an insurance policy that the borrower must pay but which benefits the lender. Often charged on loans greater than 90 per cent of the property value, MIG premiums are added on to homeowners' monthly repayments - and protect the lender should you default on the loan.
Pay attention to the true cost of mortgages - the full cost over the full term - not just the headline rate. Think about arrangement and valuation fees, as well as legal costs. These all add up, but there is a plethora of products that cover some, if not all, associated costs.
By Jennifer Hill