Remortgages

For homeowners, the option of a remortgage can be a suitable course of debt consolidation or just lowering the monthly payment on your mortgage, or to free up more capital for other uses. There are several types of remortgages, and help is available from a number of reputable sources. You should definitely do some shopping around and get as much information as you can about the advantages and drawbacks of the different

If you are looking for the lowest possible payment in the initial stage of the loan, a tracker mortgage may be a good choice in today’s market. The interest rate (and therefore the payments) on a tracker mortgage are tied directly to the base rate established by the Bank of England. When that drops or increases, your payment is adjusted accordingly. With these loans, make sure you are aware of any compulsory insurance and if there will be an early repayment charge if you want to change lenders or loan programs.

A discount mortgage or remortgage, as the name implies, offers an interest rate lower than the prevailing BoEBR (Bank of England Base Rate), usually one or two percentage points. However, the loan is discounted for a specified period, such as two years, and if the interest rates go down your payment might not be adjusted. This is another instance where the lender will probably include an ERC provision.

A capped mortgage is one that guarantees your monthly payment will not go above a specified amount, no matter what the current interest rate. If the rate drops substantially you may get the advantage of a lower payment, but in many cases you end up paying more than the best current rate, and again there is likely to be an ERC.

A flexible mortgage basically allows you to tailor your repayment plan to fit your own financial circumstances, i.e. making overpayments or taking ‘payment holidays’ if your income is variable. This type of mortgage can be a great advantage in some cases – if you are self-employed, for example. However, you may be paying a higher interest rate and greater fees at the outset.

Cash back mortgages offer a percentage of the loan as cash when the loan is initiated, and this can be a big incentive if your financial situation requires it. Remember that you are likely to pay a higher interest rate for these loans, and there may be other costs such as an ERC.

The offset mortgage may be a good option if you have a significant amount in savings. In this case you make monthly payments as specified, but you’re only paying interest on the amount of the loan less the amount of your savings account. Your savings are used as an overpayment, so the loan is paid off faster, and there are tax advantages to this plan, but the interest rate will probably be higher.

For many homeowners who are alarmed by the fluctuating interest rates in the open market, a fixed mortgage may be the way to go. As the name implies, with this arrangement the interest rate on your loan will stay the same throughout the life of the loan, so if you take out a loan at a time when the BoEBR is relatively low, you’re protected against the likelihood that rates will start to rise again.

The potential drawback here is that your rate will not drop if things go the other way, and there is almost always an ERC to consider if you want to pay the loan off before its term is up.

An interest-only mortgage is attractive because the initial payment is lower; you are paying only the interest on the loan in monthly payments. The idea is to set up an investment fund or account with the intention of paying off the balance of the loan as soon as possible. Remember that your interest payments do not decrease the amount of the loan balance, so you must take into consideration the final due date of the loan and the cost of remortgaging if you are unable to make that lump sum payment.

Another item to consider with any mortgage or remortgage is how the interest rate is calculated. This may be daily, monthly or annually, any variable rate loan is subject to changes based on the SVR or standard variable rate. If calculated yearly, you will lose out if rates go down during that year. As a general rule (but not in every case) you, as a borrower, will save money in the long run with a flexible mortgage in which the interest is re-calculated daily or monthly.