FOOL'S EYE VIEW
60-Second Guide To Re-Mortgaging

By James Carlisle
September 11, 2002

Referred to in everyday language as 'the bloody mortgage' and generally incorporated into phrases like 'well it pays the bloody mortgage', mortgages are unfortunately a fact of life for most of us if we want to own our home. What isn't a fact of life, however, is being tied into a bad mortgage.

Depending on its size, a bad mortgage could be costing you tens, or even hundreds, of pounds a month. So it's worth checking regularly to see if you can't do any better. To help you on your way, we offer up our Foolish 60-Second Guide To Re-Mortgaging!

0:57 What is re-mortgaging?

You go to a new mortgage company and ask them for a mortgage in much the same way as you would when buying the house the first place. If they're happy with you, they'll give you the new mortgage and pay off your old one. The process will involve some costs, so make sure you factor these into any decision.

Whether it makes sense for you to change your mortgage will depend on whether you're happy with your current interest rate and repayment terms, and whether you're tied into it.

0: 46 Is your current interest rate a good one?

The most common reason for a bad interest rate is that you opted for a heavily 'discounted' rate at the start. There are no free lunches and mortgage companies can only afford to offer these by having a heavy premium on their 'standard variable rate' that you switch onto after the discounted period has ended. If this sounds familiar, then have a good look at the rate you're paying and what you could be paying elsewhere.

If you're on a variable-rate or tracking-rate mortgage, then comparing interest rates should be relatively easy, but it gets more complicated if you're on a fixed rate deal. The comparison for these would be other mortgages with a fixed rate that expires just when your current one does. There's more about how to compare interest rates in the Fool's Homeowning Centre and in this article).

0: 35 Are you happy with the repayment terms?

Whether or not you're happy with your interest rate, you might want to change the repayment terms on your mortgage. For example, many people with interest-only mortgages linked to endowments are now finding that their endowments probably won't pay off their mortgage. One of the best solutions to this is to switch the mortgage to a repayment, or 'part-repayment' basis.

One mortgage option that's becoming increasingly competitive is the flexible, or current account mortgage. With these, you choose how quickly you pay back the capital and many people are now opting for the flexibility they offer.

An important point to note is that changing your repayment terms does no necessarily mean changing your mortgage company. Generally speaking they'll be happy to accommodate you changing to a different option if they can and you'd avoid the costs of switching mortgage companies. So speak to your existing mortgage company about their different repayment options first.

0: 25 Are you tied in?

If you enter into a mortgage with some attractive upfront, or perhaps long-term, features -- like discounted or fixed rates -- then there might be 'redemption penalties' attached, to make sure the mortgage company gets its pound of flesh before you go swanning off to someone else.

If you fix the interest on your mortgage for 5 years at 6% and interest rates promptly drop to 4% and look like they're going to stay there, then it's fair enough for the mortgage company to expect compensation for your trying to get out of the deal early. After all, you wouldn't expect to allow the mortgage company to get out of it if interest rates jumped up to 8%. But they're not allowed to stop you leaving, nor make it too difficult.

If you're not tied in, then great -- if you want a new mortgage then off you go and get it! But it might still make sense to move on even if there are redemption penalties. After all, the redemption penalty should, roughly speaking, reflect the loss to your mortgage company of you getting out of the deal early -- and their loss is your gain.

If the redemption penalty exactly matches the cost to the bank of your getting out of the deal, then it makes no difference whether or not you get out of it and it's probably not worth the bother. If the redemption penalty is much higher than this, then it might be illegal and you might be able to get out of it (start by talking to the Financial Ombudsman). If the redemption penalty is much lower than the additional cost of staying in the mortgage, then it probably make sense to move to a new mortgage.

The sums can get quite complicated if you want to do it very accurately but, then again, if rough calculations show that there's not much in it, then there's probably not much in it.

0:12 Might I just need to re-mortgage again in a couple of years time?

Maybe. That depends on the mortgage you're getting. Does it have a heavily discounted period for a couple of years after which the interest rates is likely to rocket? If so, then you'll need to be ready to re-mortgage again in a couple of years time.

If you're happy to do that, then fine -- some people re-mortgage every few years to keep themselves on an attractive rate -- but things might eventually get tricky if you do it too often. If your new mortgage company pops along to the Land Registry to register its mortgage and sees a list of previous mortgages as long as its arm, then it might be a bit sniffy about giving you that heavily discounted rate for two years. But there's a lot to be said for planning not to have to re-mortgage by getting a good competitive mortgage that won't ramp up its interest rate in a few years' time. At least it saves a lot of hassle!

Got a few minutes more?

Find out more about howeowning, mortgages and remortgaging in the Fools Homeowning Centre.