How to reduce your monthly mortgage repayments

A remortgage is a mortgage that replaces an existing mortgage borrowed for the purpose of purchasing the property. Remortgage deals are often sought to reduce monthly repayments by finding a mortgage with a lower interest rate, or to free up finance from the increased value of the property. Remortgaging also allows you to consolidate existing loans to one manageable monthly payment or raise money to buy a new car or home improvements.

A remortgage could enable you; to reduce your monthly repayments by securing a cheaper mortgage; release some of the value built up in your property for other spending, such as home improvements or paying off debts; reduce monthly repayments by extending the term of your mortgage, which will mean it takes longer to pay off the loan and could cost more; and to reduce the mortgage term by finding a cheaper deal and keeping your repayments the same to become mortgage-free sooner.

You should start to think about remortgaging three to six months before your current deal ends. The most common time to remortgage is when the fixed or introductory tracker or discounted rate on your mortgage comes to an end. At this point your lender will usually move you to their standard variable rate (SVR). Over the past year or so, there has been a significant decline in remortgage activity because borrowers have actually been better off staying on their lender’s SVR; experiencing rates lower than the rates available on a new mortgage product.

SVRs are not directly linked to the base rate, which is why lenders can change them even though the Bank of England hasn’t altered the country’s official rate of interest since last March. There is also a considerable variation between the SVRs charged by different lenders and now the market is starting to see SVRs increase as new mortgage rates become more competitive and the funding crisis recedes.

Choosing a new mortgage with the lowest interest rate may not actually be the cheapest option. You also need to consider any arrangement fees as well, because you could find that it is actually cheaper to pay a slightly higher rate of interest if the set-up costs are lower, but this will depend on how much you need to borrow. If you are borrowing a large amount, it may be worth paying a larger arrangement fee in return for a low interest rate but on smaller loans it is likely you may want to opt for a higher rate in return for a lower set-up fee.

The amount of equity you have in your home can really make a difference to the competitiveness of the mortgages you’ll qualify for. Currently in order to obtain the most attractive rates you really need a deposit of at least 25 per cent and in some cases more.

If you remortgage there will also be legal and valuation costs to consider. Typically these will be lower than if you were buying a house but your new lender will require a valuation survey and a solicitor will need to do the paperwork. You may find that some mortgage products include a free valuation and legal work for those remortgaging.

The length of time you want to be tied in to your current mortgage deal for is another important consideration. When comparing mortgages this is an important decision you will need to make because most products will charge an early repayment charge (ERC) during the introductory period – this may have a greater impact if you choose a discounted, fixed, cashback or capped deal. So with a two-year fix or tracker for example, you will probably be charged a penalty to get out of the deal during the first two years.

With shorter term deals, being tied in isn’t usually too much of a problem. Where it could become more of an issue is for example with longer term deals such as a 10-year fixed scheme which could be very costly if you want to finish the scheme early. However, not all products have an ERC. Most lifetime trackers for example, are completely penalty-free, which could make them a highly flexible option if appropriate to your particular situation.

You should not also assume that ERCs automatically end when your fixed or discount rate ends. Some loans may have overhanging tie-ins after the initial deal ends and you could find that you need to pay the lender’s SVR for a set period. With interest rates currently low, this is not necessarily a bad position to be in as some SVRs are lower than the fixed-rate mortgages on offer, but at the point rates begin to rise lenders will start to put up their SVRs.

If you decide that remortgaging is the right option, you will be charged an exit fee by your current lender. This is to cover the administration costs of closing your existing mortgage account and costs will vary depending on each lender. The fee will be stated on your original mortgage offer and it’s important to check that it matches – lenders are not allowed to increase these fees once you have signed up for a loan.