Are you at the end of your current mortgage deal? Or already on your bank’s standard variable rate? If you’re looking for ways to save money and reduce your monthly outgoings, remortgaging could make a bigger difference to your cashflow than anything else.
Last year, research by online mortgage broker Habito revealed that 1 in 4 homeowners was on their lender’s standard variable rate (SVR). That’s the rate you’re automatically bumped to once your existing mortgage deal comes to an end. A good proportion of the homeowners surveyed didn’t know what rate they were on. Many thought that a remortgage was a second mortgage – and that remortgaging meant taking on more debt. Perhaps most worryingly, 1 in 10 believed staying on the SVR was a good move, because it enabled them to pay off their mortgage faster, as they were paying more money each month.
These common beliefs about how mortgages and mortgage rates work lead to one outcome: borrowers spending more money than they need to be.
In this post, we dispel these mortgage rate myths and explain why remortgaging is usually a far better choice than staying on your lender’s SVR.
Will staying on my lender’s SVR help me pay off my mortgage faster?
No! We can’t stress this enough. When your existing mortgage deal comes to an end, if you do nothing, you will be moved to the standard variable rate. The name of this rate says it all really: Standard (i.e. pretty rubbish) and Variable (i.e. likely to go up in line with rising interest rates).
Being on the SVR will almost inevitably mean you’re paying a higher interest rate than the one you were on before. In many cases, the SVR can be at least twice as high as the preferential rate you get when you remortgage. And none of the extra money you pay each month goes towards paying off your property; it all disappears in interest.
So, rather than helping you pay off your mortgage quicker, staying on the SVR will do the opposite. Because the more you spend on the interest, you’ll have less to put towards paying down the mortgage itself.
Is a remortgage a second mortgage?
No. A remortgage takes the mortgage(s) you already have and makes them more affordable. It isn’t an additional mortgage. When you agree a remortgage, your existing mortgage switches to a new product, either with your existing lender or someone new. So if you had one mortgage before, that will still be the case after your remortgage.
How does remortgaging save you money?
Assuming you’re on a repayment mortgage (as opposed to an interest-only mortgage), the amount you pay each month is split into two by the lender. One portion goes towards paying off what you owe on your home. The other portion goes to the lender in interest.
If you remortgage rather than sticking with the SVR, the amount you pay off your home each month won’t change, but the interest you pay should drop. Often, it could drop by a lot.
How much could remortgaging save me?
As you might expect, it’s different for everyone. It depends on the size of your mortgage, the value of your home, your personal circumstances and the value of the remortgaging deal you get compared to staying on the SVR.
That said, the Habito survey crunched some numbers and found that, if you’re on the SVR with one of the big six lenders, swapping to one of their cheapest deals could save you an average of £4,080 each year.
At a time when bills are rising faster than ever, why wouldn’t you take the opportunity to reduce your mortgage?
Will I be able to remortgage?
The survey also revealed that one of the reasons people weren’t remortgaging was because of the fear that their application would be unsuccessful. We know this is something a lot of people worry about, particularly post-pandemic when many were furloughed or relied on bounceback loans and similar for a period. For many, there’s a concern that their recent bank statements don’t look quite as healthy as they otherwise might.
It’s true that lenders will want to ensure you can afford the mortgage, and the more affordable your bank feels the mortgage is, the better the rate they’re likely to offer you. But it’s also true that UK property prices have risen a lot over the past year – by an average of 11% to March this year. That’s good news for your Loan to Value.
‘Loan to Value’ (LTV) compares the size of the mortgage to the value of the property. A property worth £200,000 with a mortgage of £20,000 has an LTV of 10% – a small LTV that lenders love. In contrast, the same property with a £150,000 mortgage has an LTV of 75%. That’s more of a risk for lenders and the mortgage deal they offer will reflect that.
But when house prices rise, LTV’s shrink. Let’s assume that, in the past year, your home increased in value by 10%. It’s now worth £220,000. All of a sudden, £150,000 represents an LTV of 68%. Without you doing anything, your LTV has improved, and that makes your remortgage a more attractive option for lenders.
So although there may be some factors that make remortgaging a bit more of a challenge, you may find that other factors balance out the negatives.
Can remortgaging help me pay off my mortgage faster?
Yes. Earlier in this post we mentioned that sticking with the SVR wouldn’t help you pay off your mortgage faster. Remortgaging could though and here’s how…
Suppose you remortgage and find yourself saving £200 each month compared to what you’d pay on the SVR. Given the rising cost of living, you may need to use that £200 to pay for food, energy, petrol etc. However, if you are able to, you could ring-fence the money you save and use it to overpay your mortgage. By doing so, over the life of your mortgage, you could save thousands of pounds and pay off your mortgage years earlier than if you just paid the basic amount.
Ready to remortgage?
Remortgaging can save you money now. And if you’re able to invest the savings in paying down the balance, it could save you a huge amount in the future too. If you’re on the SVR or your existing deal ends in the next few months, speak to one of our advisors to find out how much you could save. Call Sharon Rigden on 01772 431233 or email srigden@rfm-more.co.uk
RfM Mortgage Services is a trading style of Key Mortgage Advice Limited who is authorised and regulated by the Financial Conduct Authority. We are entered on the Financial Services Register No 312930 at register.fca.org.uk/
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