Trussle – an online mortgage broker – shares with us some of the most common reasons why you may want to think about switching your mortgage.
Your home will likely be the most valuable thing you own, so it’s vitally important to take good care of it. This includes looking after your mortgage.
Over time, the mortgage you took out when you bought your home may not continue to be the right one for you. Interest rates can go up and down, mortgage lenders introduce new and updated products throughout the year, and your own personal circumstances change over time – all things that can make you want to consider a remortgage.
Here are a number of reasons you may want to consider switching to a more suitable deal.
1. You want to reduce your monthly payments
Reducing the amount repaid each month is one of the most common reasons to remortgage. You might want to do this to:-
- Free up money to put towards your savings
- Put more money towards raising a family
- Cope with unforeseen expenses, such as medical costs or ongoing elderly care
- Have money available to cover any reduction in salary
Depending on the type of mortgage you have and what alternatives are available, savings could range from hundreds to thousands of pounds per year. Trussle’s remortgage calculator can help you estimate how much you could expect to save or whether you should consider changing.
2. You want to pay off your mortgage earlier
The sooner you pay off your mortgage, the less it will cost you in the long-term. So if you’ve received a raise or an inheritance and think you’ll be able to afford to pay more towards your mortgage each month, it could be worth looking into switching to a shorter mortgage term. You may be able to pay more into your current mortgage to help reduce the term, so be sure to check your mortgage agreement to see if and how much you’re able to over-pay.
There are definitely savings to be had by reducing the term of the mortgage. For example, reducing your mortgage term from 30 to 25 years could save £22,000 over the duration of the mortgage (based on 10% deposit on a £200k property with a 2.24% initial 2-year fixed rate and 3.74 SVR).
Switching mortgage may allow you to pay a one-off lump sum towards the new mortgage. Although this involves paying more up-front, your monthly outgoings might not need to increase.
3. You want to raise funds for a major purchase
Another common reason to remortgage is to improve the home itself, by renovating or adding an extension. As well as making it nicer to live in for you and your family, you’ll also be adding value to the property.
Of course, you may also want to free up some money for a new car or to gift a deposit for your child’s first home.
Remortgaging for this purpose involves taking equity out of the home. In other words, you’ll need to give the lender increased ownership of the property in exchange for the cash. This can sometimes increase your monthly mortgage repayment, but not in all cases.
4. Your home has increased in value
As you pay off your mortgage your home may also increase in value. As the outstanding loan becomes a smaller percentage of the home’s value, lenders start to offer better interest rates.
This is called the loan-to-value ratio (LTV) and is generally separated by 5% ‘brackets’. The highest LTV you can get is generally 95% and the lowest is generally around 40%.
If you’re lucky, the value of your home may have increased enough to put it into the next bracket and secure a better interest rate.
5. You want to avoid paying your lender’s Standard Variable Rate
When you get a mortgage, the lender will generally provide an initial fixed interest rate for a limited time period (usually 2 to 5 years). At the end of this period, the lender will move you onto their higher Standard Variable Rate (SVR).
This Standard Variable Rate can be several percent higher than the initial rate, potentially increasing your monthly payments significantly.
Switching from a lender’s SVR of 4.63% to an initial rate of 1.39% for example, could save the average homeowner £3,500 per year during the new initial period.*
It can often make sense to switch, and large savings can be made by doing so. But bear in mind that there can be costs involved in remortgaging, including exit fees charged by your current lender. Speaking to your broker will ensure you receive suitable advice.
*Based on mortgage amount of £173,400 repayable over 25 years, as of Nov ‘16
Noddle is a credit broker, not a mortgage broker.
Your home may be repossessed if you do not keep up repayments on your mortgage.