Could You Lower Your Monthly Payments with a UK Home Remortgage?

Are you considering getting a remortgage on your UK home? If you are, you may be making a very wise move. Ray Boulger, senior technical manager at broker John Charcol , says “With the bank rate rise in August and the distinct possibility of another next month, many borrowers are keen to fix the rate on their home loans.” A remortgage now could save you quite a bit of money later.

After more than a year of a base interest rate of 4.5%, on August 3, 2006, the bank rate was raised to 4.75 and many analysts expect an additional quarter point rise before the end of the year.

Although a quarter of a point may not sound like much, on a typical €150,000 mortgage, it raises monthly payments by around €21. If you are thinking of a remortgage,, this may be a good time. The UK remortgage market has been booming throughout most of 2006, with remortgages accounting for an average of approximately 37% of all mortgages by value in the year to date.

Why do people remortgage?

The simple answer is to save money. Although the method or goal may differ, the basic theory behind remortgaes is to better your financial situation. In one survey that asked people what motivated them to remortgage their property, the top answer was “low interest rates” given by 24% of respondents. The second most popular reason was “professional advice” listed by 19% of respondents.

On a typical mortgage of €100,000 on 25 years at 6.9%APR, your payments are €687 monthly. By getting a remortgage at 4.5% APR, your payments would drop to €550, saving you €137 a month.

In a Bank of England survey asking their customers why they were obtaining a remortgage, the number one response was “to finance home improvements” with approximately 50% of people choosing this answer. The number 2 answer in this survey was to finance a major purchase.

Security is another common reason people give for remortgages. It is estimated that there are currently 800,000 to 1 million homeowners coming to the end of 2-year fixed rate mortgages. These home owners will be looking for affordable remortgages. David Dyer, commercial director of Direct Line Mortgages says “Fixed rate mortgages offer the security which many customers are comfortable with, and of late, the 2-year fixed rate has been the most popular type of mortgage in the country.”

It is estimated that 92% of all mortgages, including remortgages, taken out in 2006 were fixed rate mortgages. Interestingly, long term fixed rate mortgages are uncommon, although this may be ready to change if interest rates rise. For example, a 15 year fixed rate mortgage at 4.99% from Stroud and Swindon was initially offered on September 25, 2006 and by October 11 the offer ended as “demand was too high and the lender ran out of funds.”

Debt consolidation is also a popular reason for getting a remortgage. As UK consumer debt has soared in recent years, many homeowners have used the equity in their homes to remortgage and convert higher rate credit card debt to lower rate payments. George Buckley, chief UK economist for Deutsche Bank, explains “Consumers have been substituting away from consumer credit in favor of borrowing against the value of their houses.”

And, of course, home improvements are a favorite reason to remortgage and take equity out. Ian Davis, Director General of the Federation of Master Builders, says “The upward march of house prices means there is a huge amount of capital tied up in property and low interest rates are making it possible for many homeowners to cash in on the windfall.” One survey reports approximately 50% of homeowners who took cash equity out of their homes via a remortgage spent at least part of the money on home improvements.

Choosing remortgages or secured loans

Although both remortgages and secured loans are loans secured by property, most people choose remortgages. This is because, generally, remortgages offer a lower interest rate, resulting in lower payments. Martin Lewis of Money Saving Expert notes “Mortgages are simply a special type of secured loan with cheaper rates.” Secured loans, as a “second charge” usually carry approximately a 2% higher APR although rates can go much higher.

However, there are some circumstances in which a secured loan could be a better choice than a remortgage. These include:

If early repayment of your current mortgage carries substantial penalties. In this case, you may be better off to wait till the mortgage expires and get a secured loan now.
If you have had credit or debt problems since your current mortgage was taken out. In this case, an adverse credit remortgage may raise your rates significantly, so you may be better off to keep the lower rate mortgage and get a secured loan. Even if you have to pay a higher rate, it is only for the loan amount and not for your entire mortgage amount.
If you have little or no equity in your property, a secured loan could be a better choice than a remortgage. Banks and mortgage providers generally lend up to 90% of loan-to-value, while many secured loans can provide up to 125% of property value.
If speed is an important factor in getting the loan, a secured loan can be processed in a matter of days in some cases, while most mortgages require at least 4-6 weeks to be processed. In addition, most secured loans have no fees that you need to pay upfront and no exit fees.
Secured loans are available for a shorter period of time than a remortgage, which means you pay less interest. As Martin Lewis says “Mortgage debts are paid off over a long time and 5% over 20 years is more expensive than 10% over 5 years.:

So if you are one of the 8 million UK homeowners with a mortgage or home loan, you may want to check your options before deciding how to proceed if you plan to remortgage or take out a secured loan.