Want a cheaper mortgage? Here's how to get one!
It's no coincidence that 'death' and 'pledge' are the roots of the word 'mortgage'. If you're coming up to remortgage in the next year or so, you may well feel you have pledged a deal with the devil and now your neck is very much on the line.
Since the dreaded credit crunch got its grip on Britain's mortgage lenders, the cost of borrowing has risen astronomically. According to Fool partner Moneyfacts, the average fixed rate has increased from 6.28% to 6.69% over the last year and the average tracker has jumped from 5.97% to 6.62%, despite three Base Rate cuts.
Borrowers who took out mortgages two years ago, when most rates were around 4.5%, will see a 2% jump in their monthly payments when their current deal expires.
So if you're on an affordable rate right now, and would like to keep it that way when you come to remortgage, read on.....
Improve Your Credit Rating
The first step on the road to cheap mortgage borrowing has to be attaining a spotless credit record. Remember, you want to borrow a shed-load of cash at a time when no one particularly wants to lend it to you - you need to present yourself to the lender as super-reliable and responsible.
So check your credit record. Make sure there are no mistakes on it. If there are, get them corrected. If there aren't, but you can see that you've missed a few payments, then try to improve your record before you come to remortgage. (Read my Foolish friend Szu Ping Chan's excellent article on How To Improve Your Credit Rating for help on how to do this.)
Increase Your Equity
The secret to bagging a cheap rate in today's hyper-cautious mortgage lending market is to increase the equity in your home. Lenders are only competing for the crème-de-la-crème: the A-list, creditworthy borrowers who have so much equity in their home that they can see out falls in house prices without putting any of the lender's money at risk.
For example, a borrower with a 40% equity stake in their home can get a rate at 5.69% from Abbey, while the best rate on our mortgage tables for a borrower who only has a 10% stake is 5.95% from L&C.
The trouble is, with house prices falling, increasing the equity in your home is a bit like swimming against the tide. You're going to have to work against the market. Here's how to do it:
1. Make The Most Of Your Current Rate
You're unlikely to find a new rate as cheap as your current deal. So you need to make the most of that cheap rate while you can.
First of all, make sure you are on a repayment mortgage (not interest-only). A repayment mortgage means you are gradually increasing the equity in your home with every single payment. It will save you thousands of pounds in interest, too.
Secondly, check whether you are allowed to make overpayments. Most mortgage lenders will allow you to overpay by around £500 a month, and some will allow as much as 10% or more. Be careful though -- you may be landed with Early Repayment Charges if you pay off too much.
I can't stress how important it is to try to overpay, especially if you took out your first mortgage within the last couple of years, and only put down a 10% deposit or less. With prices currently falling at a rate of around 2% a month, you may find your equity stake has all but disappeared when you come to remortgage, which means you will be moved onto the lender's expensive Standard Variable Rate (typically about 2% higher than the most competitive deals available).
By overpaying as much as you can afford now, you will be in a much better position and may be able to keep pace with house price falls.
What's more, if you overpay, you will reduce your mortgage debt much more quickly -- so you will be mortgage-free much sooner than you expected! This will save you thousands of pounds -- you can use our mortgage overpayments calculator to figure out just how much.
2. Improve Your Home
If you can increase the value of your home, you will increase your equity stake. So if you've been considering make some home improvements, now's a good time to start work!
And I'm not just talking about painting and decorating. To add significant value to a property, you need to add square footage. Check out the top value-adding home improvements and my fellow Fool Ed Bowsher's suggestions on how to pay for home improvements.
Compare The Whole Market
If you truly want the cheapest mortgage deal, you need to shop around so you can compare deals from the whole of the mortgage market.
The good news, you can book mortgage deals up to six months in advance. So set a note in your diary to start looking around six months before your current deals expires. Keep an eye on The Fool's best buy tables, or get advice from our whole-of-market mortgage brokers. According to Moneyfacts, deals are typically available for just 11 days in today's market, so you need to act fast before the best rates are withdrawn.
Don't be disheartened if you do not think you will manage to build up enough equity to get the absolute cheapest deal. The more equity you've got, the cheaper your next deal should be, so every penny really does count.
Now you know what to do, what are you waiting for? There's no time to waste. The Grim Reaper --sorry, the mortgage lender -- will soon be knocking at your door...
More: How I Picked My Mortgage | Beat The Mortgage Rate Rises
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