Remortgaging – short-term pain, long-term gain

A report from the Bank of England (BoE) revealing that the number of loans approved for remortgaging was up in January got me thinking how people go about finding the best deal and what prompts them to make the decision in the first place. Mortgage figures are easy to come by in the world of consumer finance, but the average man and woman on the street are not particularly interested in all the latest developments.

However, one of the main impetuses to remortgaging is interest rate news. Although people in the media are in a position to examine the impact of borrowing cost fluctuations on quite a minute level, most people only start thinking about remortgaging when mainstream news outlets, such as the BBC, mention inflation or the BoE. Obviously, when rates are up or the threat of hikes is apparent, homeowners become painfully aware of how policymakers are making decisions that could potentially erode their disposable income and affect their quality of life.

Before Christmas, internet bank Egg reported that nearly ten million people in the UK were thinking of remortgaging over the subsequent three months because of recent interest rate increases. To highlight the correlation between interest decisions and a change in the temper of homeowners, Egg published figures that showed 60 per cent of homeowners are considering switching to a fixed-rate mortgage, 12 per cent are seeking variable-rate mortgages, eight per cent are considering switching to discount-rate mortgages and 5.8 per cent are contemplating moving to a tracker-rate mortgage.

Homeowners that have their wits about them (and who can afford not to?) can save hundreds or thousands of pounds if they do a bit of homework and review the mortgage market thoroughly. With the unstoppable growth of the internet, I guess most people now look to price comparison sites for an overview of the best deals. Many of these websites feature handy mortgage calculators that swiftly work out how much can be saved by remortgaging to a lower interest rate, or how much it would cost to increase the size of a loan.

Capitalising on the mood for change, these price comparison sites have been urging fixed-rate mortgage holders to remortgage as soon as possible and to act now in order to drive down monthly payments. In fact, borrowers whose fixed-rate three-year deals expired recently would have faced standard APRs of around 6.55 per cent, which is more than two per cent higher than the average rate in 2003. Nonetheless, despite the market being less favourable to homeowners, the general consensus is that there are still good deals on the market.

One of the good things about things price comparison sites – apart from the fact that they're usually impartial – is that they allow harassed homeowners to research the mortgage market in an easy, convenient way. This allows them to compare and contrast current deals with others. In an age where everyone works longer hours and time is precious, these one-stop-shops can be a godsend. At the same time, it is worth checking whether your current lender can provide a better rate.

Changing a lender could be considered something of a hassle, but if it saves a significant amount of cash every year, it's probably worth the short-term pain. Obtaining a redemption statement and finding out whether any upfront costs will be levied is a necessary evil. Basically, homeowners need to seriously weigh up what they would gain by moving their mortgage.

While it is all too easy to get bogged down in the minutiae of remortgaging and become confused by a range of confusing terms and penalties, it is probably best to keep in mind the bigger picture, which is to save money. After all, banks are more than prepared to drive up penalties and rates of interest to augment their impressive profit margins, so it is up to individual men and women to do all they can to hold on to their hard-earned money. If this involves a bit of web-searching and head-scratching, so be it.

Author: Richard Mather

UK in remortgaging limbo as rates decision nears

As the nation looks forward to a well-deserved break over Easter, which could involve a weekend away or painting the spare bedroom, so the Bank of England is preparing to make another interest rate decision on April 5th, something that is likely to be ignored by most Brits who have more pressing things to worry about.

And if the hearts of men and women are not exactly aflame with the desire to know the fate of interest rates this month, some will be slightly concerned whether or not their mortgage payments are about to go skyward again.

Indeed, the last few weeks have seen a rush (of sorts) to remortgage to fixed-rate deals. In fact, the Bank itself has reported that 116,000 remortgages were taken out in February, 9,000 higher than in January, a fairly reasonable indicator that the surprise 0.25 per cent interest rate hike in that month had an unpleasant impact on buyers.

Despite all the talk of remortgaging, which is still a favourite topic among finance journalists and lending firms, the usual media anticipation has been slightly muted this month, almost as if people are slightly sick of trying to second-guess rates. Just in case, you're interested, the general consensus is that rates will probably go up one more time before or during summer, but nobody knows for sure and what happens after that is anybody's business.

At the same time, I think the general public is getting used to having money taken off them through 'legitimate' channels – tax, utility bills, mortgages, loans – despite the fact that wage hikes are failing to catch fire. So it is in this climate of creeping costs that people fall into two camps – those who do nothing and the let tide of rising costs wash over them, while others take a more aggressive approach by taking their business elsewhere. And if this involves people leaving behind their current bank and finding a cheaper deal at another lender, so be it.

As more and more people start worrying whether an economic malaise is starting to set in, experts are now split as to what kind of remortgaging solution is best for the Britain's homeowners. While some pundits still believe that fixed-rate deals are the answer, others are less sure and are wondering if variable-rate mortgage are the future for the time being – especially if rates have reached their peak. This means that homeowners may not want to be locked into fixed rates and may decide to take out capped tracker or capped discount mortgages.

But if experts cannot agree, then how are homeowners supposed to make their minds up? And here lies the problem: homeowners know they ought to remortgage (everyone else seems to be doing it) but do not have much of a clue when it comes to making a concrete decision. And while price comparison sites are very good at coming up with stats and trends and stray bits of advice, somehow there is a feeling at the moment that everything is in limbo.

Still, even if homeowners make the decision to watch the pennies and not spend so much over Easter, then at least some form of saving action is taken. However, it might be even wiser to wait for the Bank of England to make its decision this Thursday and see what the future holds.

Author: Richard Mather

Remortgaging – making a decision in a world of flux

The other morning I read that record numbers of homeowners are taking out fixed-rate mortgage deals as the threat of another interest rate hike hangs over the heads of homeowners like the sword of Damocles. According to the Council of Mortgage Lenders (CML), around three-quarters of home movers in recent weeks have fixed their monthly mortgage payments in an attempt to protect them from the next rate increase.

At a time when the market can apparently predict with some accuracy when the next rate rise will occur (notwithstanding January's hike, which took most people by surprise), fixed-rate deals are pretty attractive as far as options go. Basically, mortgage lenders assess where rates will go over the next months and so fixed rates rise or fall as a consequence of their calculations. The thing to remember is that the longer the term agreed to, the higher the rate will be.

But this begs the question, what if rates don't go up again? And even if they do, will it matter if lenders have already factored in the possibility? Although the CML says the average interest rate of a fixed-rate loan went up from 5.23 to 5.27 per cent in January, the Sunday Times has found that two-year rates dropped in February, with several deals now below five per cent. This suggests that the current borrowing cycle is close to peaking, if it hasn't already. And while these low rates may seem attractive, some believe that variable rates are better value.

In fact, home loans expert Ray Boulger from mortgage broker John Charcol has said that it is now too late for households to protect themselves against further rate hikes, partly because lenders have had the foresight to include another base rate increase in their deals. He also believes that borrowers could be better off going for a variable-rate mortgage, especially if rates have reached their peak and take a downward turn in the near future.

While variable deals involve lenders setting their own rates, which can rise or fall in accordance with the changes made to the base rate by the central bank, these kind of mortgages come in a range of guises, such as a tracker, capped or discounted, which may add to the confusion. The good thing about remortgaging to a variable rate is that you might get lucky and see the interest rate drop, but on the other hand you might be unlucky and see the interest rate rise. On the other hand, the advantage of remortgaging to a fixed-rate is that the homeowner knows exactly what will happen, although if interest rates drop, they will end up paying more than they might have done if they'd gone for the variable deal. And round and round it goes.

This leaves homeowners with something or a dilemma. They know they should probably remortgage but are at a loss when it comes to making a more concrete decision. Part of the problem is that the world of personal finance is riddled with contradictions and competing narratives. In the end, it means that homeowners have to base their decision on something other than macroeconomics and take a more personal outlook.

Personal judgements (which can be just as valid as those of professional analysts who are themselves merely making educated guesses) must play a part in any decision. Only the individual knows whether he or she will be able to meet repayments in six or 12 months' time. And only the individual knows whether his or her job is stable or if they are contemplating moving house when the kids go to uni. Other homeowners may simply want to play it safe or take a risk, depending on their personality and level of disposable income.

But help is at hand, of sorts, for those who seek it. Entering 'variable or fixed' into Google throws up an innumerable number of websites all clamouring to offer a lamp to the weary homeowner who walks in the valley of darkness where other lost homeowners have trod before. Some of these guides are trying to sell or broker mortgages through their website, which can be useful, although they're obviously in the market to sell a service or product. Price comparison sites are also helpful because they tend to be impartial.

While there is no easy way to make a decision regarding the type of mortgage, a judgment has to be made (even if it the decision to is to do nothing). Like everything in life, remortgaging is a risk and solutions aren't always perfect; nor does reaching a verdict preclude the fact that another type of mortgage may have been the better option after all. In the end, homeowners need to take a chance because there are very few guarantees. But as Voltaire once said: "Doubt is not a pleasant condition, but certainty is absurd."

Author: Richard Mather

Consumers and banks in battle over mortgage exit fees

One of the main bugbears of consumer groups in recent times has been the perception that banks and other lenders are ripping off customers at every given opportunity, a belief that is often grounded in reality. As newspapers continue to report of small battles taking place between consumers and banks over the issue of overdraft penalties and other punitive fees, there is evidence to suggest that mortgage exit fees could be the next campaign of war.

Mortgage exit fees, which used to be a way of covering the cost of paperwork, have grown into an industry, with lenders charging anywhere between £150 and £500. What's worse is that they are applied when a mortgage has run its course, not just when the homeowner decides to remortgage with a cheaper provider. Another irritant can be the fact that exit fees can be raised after the mortgage has been taken out, essentially making the mortgage more expensive.

It means that homeowners who took out a mortgage some years ago and now want to remortgage are being whacked by exorbitant costs, undoubtedly designed to stop people refinancing their loan. Some pundits have described the habit of switching deals on a frequent basis as 'rate-tarting', which apart from being an unfortunate turn of phrase, seems to suggest that finding a better rate with another provider is disloyal or even abnormal. This begs the question, why would anyone want to stay loyal these days when banks seem intent on attracting new customers at the expense of old ones?

I recently read an article in the Yorkshire Post by Jim Spowart, who was the creator of Intelligent Finance at Standard Life Bank, who reckons that the big banks don't place any value on mutual loyalty anymore. Interestingly, he expressed his belief that there are two types of borrower in Britain now – those who are 'rate tarts' and regularly shop around for new mortgage deal and those who "are sitting on their hands, facing stiffer fees, extra charges and higher interest rates" out of a misplaced sense of loyalty.

The upshot is that banks no longer care so neither should customers. And although this is likely to lead to a more comprehensive breakdown in industry-consumer relations, it only seems right that homeowners exercise a bit of common sense and follow the money. This is likely to happen anyway as most experts believe one or two interest rate hikes are still on the cards for this year. At the same time, there is no shortage of personal finance websites urging homeowners to seek out the best mortgage deals before they get pulled by the lenders. Of course, remortgaging is sometimes about consolidating credit card debts onto a mortgage at a low rate of interest – something that is likely to grow in popularity as more and more people struggle with unsecured credit repayments.

Returning to the problem of mortgage exit fees, the Financial Services Authority (FSA) has been looking into the issue since 2005 and it has taken until now for mortgage lenders to do anything about it. Basically, the FSA has said that lenders have to reduce charges now and justify why fees should be raised at all – and since the new rules apply historically, households are now in a position to avenge their grievances. In fact, they have inundated personal finance website Moneysavingexpert with inquires of how to download templates of fee refund letters. A minority of lending institutions have already slashed their fees, which means they are now in line with the FSA's requirements. All of which is good news for ordinary folk with bills to pay.

While it looks like consumers will win the battle over exit fees and recoup some of their money, they might not win the war, as mortgage firms are bound to offset losses somewhere else. Nonetheless, no one expects banks or consumers to slink away from conflict and it could well be that mortgages with high arrangement fees and artificially low introductory interest rates – described by the Liberal Democrats last week as a "trick" – will be the arena for some future fight.

Author: Richard Mather

Remortgaging – a cure for interest rate blues?

News that the Bank of England did not raise interest rates this month must have come as a disappointment to those pundits who have built their careers on predicting both the imminent decline of the British housing market and the prospect of hard-working Brits being tossed out on the streets because they can't afford to pay their mortgages. In truth, the bank's decision to hold rates at 5.25 per cent after three 0.25 per cent hikes in six months came as something of a relief to households who have seen the cost of living go up and up.

However, at the risk of sounding like one of these prophets of misfortune, there is a general consensus that we haven't seen the end of rising interest rates. Not only does this raise the question of when the next hike is, but how many can we expect this year. This uncertainty has prompted more than a handful of experts to recommend remortgaging as a solution to this problem. In fact, it has become something of a clarion call as a sense of urgency grips the nation's homeowners and they all pay a visit to their local bank or trawl the internet to find the most competitive deal. Some are going for fixed-rate to protect them from interest rate rises, while others are hoping to avoid being locked into fixed rates at current levels and are taking out capped tracker or capped discount mortgages.

This sense of impending danger has been compounded by frequent warnings – before and after the latest interest rate rise in January – that mortgage lenders are pulling their best deals off the shelves as homeowners look to remortgage. In fact, MoneyExpert has found that mortgage lenders have driven up their application fees in an attempt to increase profits. Since August, remortgaging fees have risen by 18.5 per cent, while the number of products with a fee that exceeds £750 has grown from 13 to 93.

Something else I've noticed is the tendency for experts to imply that everyone else is going for the best deals, while you, the reader, have failed to take action. Only recently, the chief executive of Newcastle-based bank Northern Rock was on BBC Radio 4's Today programme, telling us that a growing number of people are choosing to refinance at the end of their exiting deals, a trend that is likely to continue as rates move ever upwards. However, there is no getting away from the fact that it is in the bank's best interest to plug the remortgaging sector. But even quality newspapers have got into the act. Harvey Jones, writing for the Guardian, recently pointed out that if you have a £150,000 capital repayment mortgage, remortgaging from the standard variable rate to a best-buy deal could cut monthly repayments from around £1,090 to £890. Helpfully, he told us that this is a monthly saving of £200, which adds up to £4,800 over two years.

To be fair, though, a lot of the experts and price comparison sites that issue seemingly endless comment and press releases are acting in the interest of the homeowners and not the lender. Indeed, most experts promise that finding a better mortgage will save hundreds or thousands of pounds.

On a final note, it seems that, along with interest rates, the chief obsession of the middle classes is the direction of house prices, which either up or down, seems to upset somebody. Nevertheless, soaring house price inflation means that a greater number of homeowners now have plenty of equity tied up in their homes, which means that households have the option of either increasing their current mortgage or taking out another secured loan with a different lender to consolidate unsecured debts.

With many experts (and doomsayers) predicting a rate hike before the summer – and maybe one or two in the second half of the year – it seems that homeowners have to do something, even if it's to make a mental note to stop spending so much on credit cards. And there's no getting away from the fact that as the cost of borrowing goes up, so does the number of people recommending remortgaging as a suitable course of action, but in the end it's up to homeowners to decide where their money goes.

Author: Richard Mather