Over the years I have come across people who have been brainwashed into remortgaging every two or three years by their Bank, Building Society or their Mortgage Broker. These intelligent people are sold the story that know body knows where the interest rates will be in two or three years time and it is better not to tie yourself into a long term fixed rate just in case interest rates fall. Over the past decade we have seen some of the lowest interest rates since the Second World War and still people have played the cautious game when remortgaging to a quick mortgage deal.
So who benefits from a short term fixed rate mortgage?
Well firstly, it’s in the Banks, Building Societies and the Mortgage Brokers interest that you remortgage as often as possible. The more often you remortgage your property the more often they can earn a fee from the new mortgage lender and possibly a fee for arranging the new mortgage from you the client. If you pay for a remortgage to be arranged for you then the person arranging your new remortgage should be qualified and registered with the Financial Services Authority (FSA). They should provide you with a business card, an Initial Disclosure Document (IDD) outlining the process and their charges. As well as a Keyfacts document for the mortgage product they are recommending you along with a ‘Reason Why Letter’ explaining why they recommended that product.
Secondly the new mortgage lender will charge you a product fee for the new interest rate deal, sometimes they will charge you a valuation fee for having your home valued and the Solicitors costs for conveyancing the remortgage. Some Mortgage lenders offer free valuations or solicitors fees check that the interest rate you are getting is not inflated to account for the free services. Nothing in this world is free and if something is that good then beware, for everything that shines is not gold.
If you pay for these costs then you could end up paying on average £995 for the lenders product fee, £395 for the valuation, £395 plus Vat for the Solicitors costs, and then there could well be a fee of £595 for the Bank, Building Society and the Mortgage Brokers’ fee for arranging the new remortgage. Don’t forget that your current mortgage lender will charge you a mortgage exit fee for closing your account which could be anything up to £295. The average cost for remortgaging your home every two or three years could be around £2,675 for the above fees, this is a lot of money to try and pay off in 2 to 3 years. Most of these fees and costs can be added to your new mortgage if you choose and most people do choose to add it to there mortgage balance. As a money saving expert I could not recommend anyone spending this kind of money to remortgage every 2 to 3 years just in case interest rates were to drop in the next few years.
Let’s consider the facts!
How much will you pay off your mortgage in the next two or three years. If you are within the first 13 years of a 25 year mortgage then I would suggest that you will be out of pocket at the end of a 2 or 3 year period based on a mortgage up to £100,000. Each time you remortgage you would add all the above remortgage costs to your new mortgage. Then over the remaining term of the mortgage deal you will try and pay the remortgage costs off and try and reduce your mortgage balance. This is an impossible situation and the longer the term you have to pay off your mortgage the more remortgage costs you are adding to your mortgage.
Consider this next time you remortgage
When fixed interest rates are below 5.5% you should search out the lowest long term fixed rate mortgage deal available. Before arranging a fixed rate scheme you should consider any overpayments that you are likely to make in the future that might shorten your mortgage term and put your mortgage deal in a penalty situation that you would have to pay to get out of. If you are planning to emigrate in the future then consider a standard variable interest rate until you have sold your home. Assuming that you have no other obstacles then it would be prudent to secure your interest rate for the longest period of time that you feel comfortable with. For some people 5 years is enough whilst other more astute people will search out 10, 15, 20, 25, or 30 years.
This information is only good if interest rates are low at the time. You should not follow this advice if interest rates are high. In other words always fix your mortgage for the longest period of time possible when interest rates are low. Many mortgages today are fully portable which means you can move home and not have to pay a penalty. You will only pay one arrangement fee at the start of the mortgage and one valuation fee and this will save you thousands of pounds when compared to the homeowner who remortgages every two years. Should you need to borrow in the future then you can arrange a second mortgage or a secured homeowner loan with your lender. When you think about it there are not a lot of reasons to keep moving your mortgage every two or three years. It is not cost effective unless you have a good reason for a short term mortgage rate
So with the above in mind you do have to wonder why you need to remortgage every 2 to 3 years. You could take a longer term view and fix your mortgage rate for a longer period. By fixing your mortgage for a longer period it will provide long term stability of mortgage payments and as your income increases so your mortgage payments become more affordable. You may decide to use any extra income in the future to over pay your mortgage and reduce the term of the mortgage and save thousands of pounds.
So next time someone is arranging your mortgage or remortgage just make sure that the advice you are receiving is genuinely in your best interest and not the banks, building society or the mortgage consultants’ best interest. They will make money everytime you move your mortgage, so it benefits them if you remortgage every two or three years. Always ask yourself this question, “If I remortgage regularly during the lifetime of my mortgage how much additional cost will be added to my mortgage and when will my mortgage finish?”
The advice offered here is not ‘a fit all circumstances’ and you must take advice from a professional Mortgage Consultant. Every mortgage arranged is different in mortgage required or amount borrowed, the term of mortgage, the homeowners’ income and their personal circumstances and age.
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