Mortgages - options for the future

Homeowners often feel that they are tied into their mortgage arrangements, just as they are committed to their bankers and their household lending such as credit card providers. However, the popularity of comparing/switching websites have made many people think again about their outgoings and how their circumstances might influence their financial planning for the future.

By far the largest financial commitment for most people is their mortgage for their principal property, or increasingly where they may have committed to a buy to let property. Even so, it is often an area of their finances which they fail to review on a regular basis to ensure that they have the best deal available.

Many borrowers may be aware that mortgages are portable, opening up the market but a significant percentage will turn to their original lenders if they are checking interest rates, products or if they find themselves in financial difficulties which are affecting their repayment schedule.

If this is the case, they may need to consider either a mortgage product transfer or entering negotiations to remortgage their property. At this point, analysis of the benefits of product transfer vs remortgage will be a crucial step.

Product transfers

f you are approaching the end of a fixed rate period in your mortgage arrangement, your lender may offer a product transfer. This will depend upon the amount of equity you have in the property, through the value you have paid off during the course of the mortgage plus the increase in the value of the building over the time since you took out the loan. The lender may offer a mortgage with a revised loan to value, reflecting the increase in value since the original loan was taken out.

The costs of this arrangement merit some scrutiny. Very often, the best deals on offer from lenders are reserved for new clients. As with other financial products or services, companies aim for new clients rather than rewarding loyalty. Anyone who has negotiated insurance policies will be aware of this and will be prepared to negotiate to acquire the best deal available.

There are, however, benefits on offer for those seeking to arrange a mortgage product transfer. The first issue is that this will inevitably work out cheaper than your lender’s standard variable rate (SVR). Once you have moved from your fixed rate deal you will almost certainly move onto your provider's SVR. This will see you subjected to an increased interest rate and mean that your monthly repayments increase.

An additional benefit of looking at another product is that it will be faster to arrange than a full remortgage. The property will not have to be revalued, legal fees can be avoided and credit searches are unlikely to apply as you are retaining your original lender and simply moving to a different mortgage product.

Although this may seem like an obvious route, there may be financial consequences. New data suggests that accepting a product transfer from your lender could mean you are paying up to £600 per year extra. As mentioned above, this may be because the mortgage provider is not offering the best deals to borrowers approaching the end of their fixed interest period.

In looking at product transfer vs remortgage it is important to look at the potential savings on offer from the latter. Remortgaging could mean that you have access to a wider range of mortgage products, meaning that you find one which best suits you and your circumstances. Often showing loyalty to your original lender will limit the options available to address your financial needs.

Remortgaging

The key points to consider can be checked with a simple comparison list. A product transfer will involve less paperwork and is potentially a faster process if you consider time is of the essence. Transferring your mortgage will be a similar process to your original mortgage application and will involve some research for the deal that suits your needs.

When it comes to valuing the property, taking out a new mortgage product transfer from your lender should involve a desktop valuation free of charge. There is a downside to this since it may not detect any added value which you have created in the property by carrying out home improvements. Furthermore, an accurate valuation may not be possible unless similar properties in the area have been marketed and sold recently.

If you are remortgaging, a surveyor will be required to reflect a true value and costs will be incurred. The good news is that this will mean you have an accurate assessment of the equity and this may mean that a wider range of mortgages and providers may be available to you, with the result that you may be able to borrow a larger sum secured against your property.

Getting your advisor to assess the market for mortgages which provide a free valuation (for mortgage purposes only) may be fruitful, reducing the overall charges and fees you may face.

Using a Mortgage Broker

The market is complex and seeking professional help is key to getting a great deal. Our mortgage advisors are ideally placed to help you through the choices available. You may be looking for greater flexibility, affordability or the lowest interest rate available in the short term. Our brokers will have access to the deals which best suit your specific requirements.

Contacting a broker is of value whether you're looking to make savings or to secure a deal which meets other specific criteria. Although a broker may feel that a product transfer may be the deal that's right for you, they will not be involved in negotiating it as this will be conducted between yourself and your lender. Even so, it is worth discussing the deal you have in place as your broker will be able to investigate affordability and alternatives, both important issues when you are looking to maximise your savings.

There may be hidden costs in such a change in your mortgage arrangements. Your provider may not reveal the fees involved unless you specifically request that information. Furthermore, the lack of this information may affect your assessment as to the affordability of the new arrangement. Even if the deal appears to be at a lower interest rate, the long term repayments may be affected and it may not be the deal you are looking for.

Don't limit your mortgage options - get specialist help

It is clear from the comparisons made earlier that once you limit yourself to your existing lender, the choices available are narrowed. As you are not a new client, you may also be excluded from some of the more attractive products they offer to new borrowers. Remortaging, in contrast, means that you can access all of the market and perhaps uncover a more attractive product as you will be new to the lender.

The two options may also vary in the kind of repayment vehicle that is on offer. Your existing lender will probably offer the same repayment method as your existing mortgage; only the rate of interest applicable will change. There could be an advantage to be gained here since most residential mortgages now have to be on repayment agreements and you may be on an interest only scheme. Remortgaging will be on repayment terms unless the equity available is substantial and you can show good earnings and a repayment vehicle.

If you are looking to refinance because you envisage difficulty meeting the loan over your mortgage term, you may hit problems with your existing lender. They will be reluctant to make too many changes to the deal which you already have, other than offering a more attractive interest rate. This means that they are unlikely to extend the period of the loan to help reduce monthly payments. Conversely, if you wanted to pay the mortgage off early by reducing the period of the loan and avoid any early repayment fees, this option may not be on the table either.

The remortgage market could provide a solution. Although most lenders want to see the loan paid off before the borrower reaches 70 years of age and will limit the loan period to a maximum of 35 years, there are some special mortgages which offer a longer period and a higher cut-off age. Your advisor will be familiar with these options and will be able to explain them to you if they feel they meet your needs and are appropriate for you.

On the issue of fees, any borrower will be familiar with the impact of legal costs from taking out their original mortgage. If you are transferring products offered by your existing lender, there should be no legal fees applicable. In the case of working with a new borrower, they will carry out any legal work necessary. In the competitive mortgage market, there are many options available which offer a basic legal service for mortgage purposes.

You may be in a financial position whereby you are also looking to transfer title or have a new partner with whom you wish to share ownership and expenses. An existing lender with which you are looking to switch products is unlikely to offer any change in title. A new provider will, however, be able to help here provided that the individual with whom you are looking to share the property and outgoings meets their financial criteria and is able to afford the new mortgage.

In many cases, a change in mortgage arrangements is not prompted by difficulty in the repayment schedule or monthly costs, but because the borrower is looking to raise extra capital from the property. If you are looking to use your existing lender this will be treated as further advance application and will need to be underwritten with the appropriate documentation generated. If this is what you are looking at then the rate options may well be limited and product choices reduced. There will also be strict restrictions as to how the funds generated can be used. The lender will also have strict standards on what equity must remain in the property once the transaction has taken place; in many cases this may be up to 25%.

A new lender may offer greater flexibility, only prohibiting funds released for tax bills or a new business venture with no credit rating available. They will also be less strict as to how much value remains in the property, potentially offering up to 95% mortgages depending on the repayment period.

This analysis of residential property finance has not touched on buy to let properties and second homes. In these circumstances, you may have fewer options when it comes to providers and they may have strict rules on loan to value ratios which influence the ability of the borrower to meet the repayment schedules. Specialist advice is essential if you are looking to refinance such a dwelling, but our experienced advisors are here to help.

Finally...

The final thing to remember is that whatever your circumstances, needs or reasons for looking to amend your mortgage agreement, the loan you have is portable and like any agreement can be subject to negotiation. Your lender has an interest in you being able to meet your repayments even though the term “fixed” may appear in the wording of your contract. Also provided that you have a good payment record and equity in your property, there are many options available to you either with your existing lender or elsewhere in the competitive mortgage market.

The Financial Conduct Authority in May 2018 claimed that 30,000 borrowers were 'trapped' in their mortgages due to their circumstances. Don't let yourself become one of these mortgage 'prisoners'. Why not contact us today for a discussion with one of our experienced advisors who will be happy to guide you through the different options appropriate to your circumstances.

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