Six remortgaging myths that may cost you thousands

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Homeowners might be paying a lot more than lb4,000 an excessive amount of in mortgage repayments every year, after lapsing onto their lender’s standard variable rate (SVR).

New research by the online mortgage broker Habito found more than a quarter of house owners are on SVR’s – and many aren’t conscious of the pitfalls.

Here, Which? explains why it’s vital to remortgage at the end of your fixed-term, and debunk a few of the biggest myths around switching deal.

A quarter of house owners overpay by thousands every year

Habito’s research found that 27% of house owners are on their lender’s SVR, meaning they’re paying an average of lb4,080 a lot more than they need to each year.

When you take out a home loan, you’ll usually subscribe to a fixed-rate deal. What this means is the number you pay every month will remain exactly the same for any set period of time (usually two or 5 years).

At the end of this period, you’ll have to remortgage to change to a different deal, or you’ll automatically be managed to move on for your lender’s SVR, which is usually significantly more expensive.

Mortgage confusion leaves homeowners from pocket

Habito’s says homeowners are paying too much as a result of lack of knowledge about how exactly home loan rates work and the need for remortgaging.

The broker’s study found that only 1 / 2 of the respondents (54%) knew that remortgaging is generally completed with the purpose of switching to some cheaper deal and reducing repayments.

Perhaps most worryingly, 18% of these surveyed said they didn’t know if they were currently on a fixed-rate deal or their lender’s SVR.

Debunking the largest mortgage myths

Mortgages are complicated, but the pitfalls of not being on your home loan could be significant.

With that in mind, we’re going to take a look at six of the biggest myths around mortgages and remortgaging to help you get up to date and be sure you’re not overpaying.

1) I don’t have to know my mortgage rate

Habito’s research discovered that many mortgage holders are in the dark about the benefits of switching and are blindly paying their lender’s SVR.

Many people simply don’t know whether they’re on a good rate or not, and the broker says this is costing them thousands each year.

The truth: It’s vital you know your type of loan and also the date that the fixed term will end.

Habito assessed deals from the six biggest high-street lenders and located the average top rate on a two-year fix is 1.26%, but the average SVR is 3.53% – that’s a gap of more than 2%.

This alone would make an impact for your repayments, however it might be much worse. Some lenders have SVR’s up to 6%, and lapsing on to one of these simple could cost a fortune over time.

2) Make payment on SVR means I’ll clear my mortgage more quickly

Habito found that one out of 10 homeowners believed moving on to their lender’s SVR (and therefore making higher monthly repayments) would help them clear their mortgage faster.

The truth: When you move on to the SVR, you’ll be paying much more each month, however this extra money won’t go towards reducing the balance of your mortgage.

Instead, you’ll actually you need to be paying more in interest.

If you’ve lapsed onto your lender’s SVR, all is not lost. You’re not tied set for a set fee of time, so you can go about finding a better deal to change to straight away.

3) Remortgaging involves extra debt or a second loan on my house

Habito’s research discovered that negative connotations and confusion around the word ‘remortgage’ would be to blame for individuals not switching deal.

It discovered that 17% of homeowners thought remortgaging involved dealing with more debt or must only be achieved out of necessity.

A further 8% of respondents believed remortgaging meant taking out another loan on their house.

The truth: Remortgaging doesn’t add another mortgage for your property. Instead, it calls for varying your current someone to a much better deal.

When you remortgage, you may either do so on the like-for-like basis or borrow more (for instance if you wish to fund small remodels).

Since you originally took out your mortgage, you’ll have been making repayments to build up your equity within the property (the quantity of the home that you simply own outright).

This implies that if you’re remortgaging like-for-like, you may be able to do so at a lower loan-to-value level and obtain a cheaper rate than you were paying before.

4) My current bank will offer you me the very best deal

Many mortgage applicants believe the initial place they should look for a mortgage loan is by using their current bank.

In many cases, this is a decision made from loyalty – you might have were built with a bank account using the provider for a long time, or have taken out loans and credit cards together.

The truth: With regards to mortgages, this really is one of the greatest mistakes you can make.

There are more than 50 mortgage lenders available, and the likelihood of your bank offering the best deal for you are tiny.

If you’re considering switching but don’t know where to go, consider taking advice from the whole-of-market large financial company.

A good broker will look at all the available deals and find the correct one for you personally – hopefully helping you save a substantial amount along the way.

5) It’s by pointing out rate

Headline rates are a great way of selecting between mortgage deals – after all, everyone loves a bargain.

With this in your mind, some applicants take a look at comparison tables and just pick the deal that looks cheapest on paper.

The truth: We communicate a lot about mortgage rates as they’re a great indication of what’s happening on the market, but the initial rate is only part of the total cost of the mortgage.

Consider this – Bank A is providing a two-year fix at 2% while Bank B wants to charge 2.2%.

It may appear obvious which one to choose before you see that the deal from Bank A comes with an up-front fee of lb1,500, as the deal from Bank B is fee-free.

All of the sudden, that decision gets to be more difficult. With this thought, attempt to consider the full picture including rate, fees and any incentives, before choosing an offer.

6) Fixing for longer is better

Five-year fixes have become extremely popular in the last few years. It used to be the situation that the five-year fix would cost around 0.8% greater than a two-year deal, but that gap has reduced close to 0.2%.

This has led to many homeowners remortgaging to longer-term deals to secure a cheap rate and protect themselves against rises for extended.

The truth: Five-year fixes could be a great option for some switchers, but they’re wrong for everyone.

Longer-term deals offer great peace of mind, but they often come with high early repayment charges.

On a typical five-year fix, you will need to pay around 5% of the mortgage balance if you wish to repay the loan within the first year (for example if you move home).

When it comes to selecting a mortgage term, it’s important to think more about your circumstances and future plans rather than focusing an excessive amount of around the cost.

Advice on remortgaging

If you’re visiting the end of your fixed-rate deal, it’s never too soon to look around, and you can usually agree a new deal up to 6 months before the end of your current one.

Before committing, it’s worth seeing what your present lender will give you, but it’s better to be proactive and get in contact yourself, as the bank may wait until close to the end of your term before contacting you.

For more advice on finding the right mortgage deal, check out our full guides on remortgaging:

  • Remortgaging in order to save thousands in payments
  • Remortgaging to produce equity
  • How mortgage payments work
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