At the end of your current mortgage deal? Or are you already on your bank’s standard variable rate? At a time when cutting costs is more important than ever, remortgaging could make a bigger difference to your monthly cashflow than anything else.
Last year, Habito’s research discovered that one in four homeowners were on their lender’s standard variable rate (SVR), that is, the rate that you automatically get bumped to once your existing mortgage deal comes to an end. Many surveyed didn’t know what rate they were on. Many thought a remortgage was a second mortgage – and that it meant taking on more debt. Perhaps most worryingly, 1 in 10 believed staying on the SVR was a good move, because it would help them pay off their mortgage faster, because they were paying more money each month.
Anyone who believes any of those things is losing money. So in this post, we’re going to take a quick look at why remortgaging is usually a much, much better choice than staying on your lender’s SVR.
Will staying on the SVR help me pay off my mortgage faster?
No! We can’t stress this enough. When your existing mortgage deal comes to an end, you’ll get moved to the standard variable rate. By definition, that’s ‘standard’ (i.e. rubbish) and ‘variable’ (i.e. it will probably go up in line with interest rates).
Being on the SVR will almost inevitably mean you’re paying a higher interest rate than the one you were on. In many cases, the SVR can be at least twice as high as the preferential rate you get when you remortgage. And none of that extra money goes towards paying off your property. It all disappears in interest.
So no, staying on the SVR won’t help you pay your mortgage off quicker. In fact, it will do exactly the opposite, because as you spend more in interest, you’ll have less to put towards paying down the mortgage.
Is a remortgage a second mortgage?
No. A remortgage takes the mortgage(s) you already have and makes them more affordable. It isn’t an additional mortgage. When you agree a remortgage, your existing mortgage switches to a new product either with your existing lender or someone new. So if you had one mortgage before, you still will after your remortgage.
How does remortgaging save money?
Assuming you’re on a repayment mortgage, each month when you make your mortgage payment, the amount you pay is split into two by the lender. One portion goes towards paying off what you owe on your home. The other portion goes to the lender in interest.
Remortgage rather than sticking with the SVR and the amount you pay off your home each month won’t change, but the interest you pay should drop. Often, it could drop by a lot.
How much could remortgaging save you?
As you might expect. It’s different for everyone, because it depends on the size of your mortgage, the value of your home, your personal circumstances and the value of the remortgaging deal you get compared to staying on the SVR.
That said, the Habito survey did crunch some numbers and found that if you’re on the SVR with one of the big six lenders, you’ll pay an average of £4,080 more each year than if you’re on their cheapest deals.
At a time when we’re all facing rising bills, why wouldn’t you take the opportunity to reduce your mortgage?
Will I be able to remortgage?
The survey also revealed that one of the reasons people weren’t remortgaging was because of the fear that their application would be unsuccessful. We know this is something a lot of people worry about, particularly post-pandemic when many were furloughed or relied on bounce back loans and similar for a period. For many, there’s a concern that their recent bank statements don’t look quite as healthy as they otherwise might.
It’s true that lenders will want to ensure you can afford the mortgage, and the more affordable your bank feels the mortgage is, the better the rate they’re likely offer you. But it’s also true that property prices have risen a lot over the past year – by an UK average of 11% to March this year. That’s good news for your loan to value.
‘Loan to value’ (LTV) compares the size of the mortgage to the value of the property. A property worth £200,000 with a mortgage of £20,000 has an LTV of 10%, a small LTV that lenders love. In contrast, the same property with a £150,000 mortgage has an LTV of 75%. That’s more of a risk for lenders and the mortgage deal they offer will reflect that.
But when house prices rise, LTV’s shrink. Let’s assume that, in the past year, your home increased in value by 10%. It’s now worth £220,000. All of a sudden, £150,000 represents an LTV of 68%. Without doing anything your LTV has improved, and that makes your remortgage a more attractive option for lenders.
So although there may be some factors that make remortgaging a bit more of a challenge, you may find that other factors balance out the negatives.
Can remortgaging help me pay off my mortgage faster?
Yes. Earlier in this post we mentioned that sticking with the SVR wouldn’t help you pay off your mortgage faster. But remortgaging could. Here’s how.
Suppose you remortgage and find yourself saving £200 each month compared to what you’d pay if you stayed on the SVR. Given the rising cost of everything, you may need to use that £200 to pay for food, energy etc. But if you can, try and ringfence the saving and use it to overpay your mortgage.
Over the life of your mortgage, it could save you thousands of pounds and help you pay off your mortgage years earlier than if you just paid the basic amount.
Remortgage with us
Remortgaging can save you money now. And if you’re able to invest the savings in paying down the balance, it could save you a huge amount in the future too. If you’re on the SVR or if your existing deal is ending in the next few months, find out how much you could save.
