Nearly half of homeowners have never remortgaged their properties, despite the fact it could save them hundreds or even thousands of pounds a year.
While almost one in three homeowners knew that remortgaging could save them money, 49 per cent had never switched their deal, according to Barclays, one of Britain’s largest lenders.
The typical borrower had been on the mortgage payment ladder for an average of 13 years and five months, its research found.
Huge savings: Taking out a new mortgage can save borrowers thousands of pounds a year – but many say they don’t understand the terms used by lenders and brokers
This means they could potentially have saved thousands by continually taking two or five-year fixed rates rather than more expensive variable deals.
Interest rates are low at the moment, which means those who remortgage stand a good chance of saving money when they do.
However, that could be set to change as the Bank of England’s base rate is due to rise, which would affect mortgage rates.
Borrowers can also remortgage in order to take some of the cash they have built up in their home, and use it for other things – though this will usually push their interest rate and monthly payments higher.
Choosing a fixed rate over an SVR could save £8,000 in two years
The cheapest mortgage available with Barclays is a two-year fix, which requires a 40 per cent deposit and has an interest rate of 0.91 per cent as well as a £999 arrangement fee.
Those not on a fixed or tracker rate with the bank would be on its Standard Variable Rate (explained below) which is currently 4.59 per cent.
For someone with a £200,000 mortgage on a 25-year term, monthly payments would be £746 and £1,122 respectively.
Over two years, a borrower on a fixed deal would pay a total of £18,894 and the one on the standard variable rate £26,926 – an £8,000 difference.
Barclays’ research also revealed a lack of awareness about some of the terminology used by mortgage lenders and brokers, which it said contributed to their reluctance to remortgage.
More than one in four said they did not know what the standard variable rate (SVR) was, and almost half were not aware of what loan to value (LTV) meant.
As such, nearly half of those who had remortgaged said they would do ‘whatever their mortgage broker told them’ rather than doing the research themselves.
A spokesperson for Barclays Mortgages, said: ‘It’s clear from our research that many find remortgaging a tricky subject to understand.
‘As a result, homeowners are sticking with what they know and potentially missing out on lower monthly payments.
‘With the average amount left to pay on a mortgage at 45 per cent, and the best deals often found at lower LTVs, remortgaging sooner could end up saving them money – not only month to month, but over the whole term of their mortgage.’
Opting for a five-year fixed term rather than a two-year fixed term could save homeowners money, as they are protected from interest rate rises for longer and pay fees less often
Of those who did remortgage, Barclays found that most (93 per cent) opted for a fixed-rate deal.
Almost all (88 per cent) fixed for two or five years. Of those, 44 per cent chose a two-year fixed term and 44 per cent chose a five-year fixed term.
Two-year fixed term deals were most popular with the under 30s as 57 per cent of this age group opting for one.
Homeowners aged 40-56 were choosing to commit to longer term five-year fixed rate deals with 47 per cent locking in their monthly payment for five years.
Interest rates are higher on five-year fixes, but they may save homeowners money in the long term.
This is because they are protected from interest rate rises for longer, and do not have to pay arrangement fees as often.
Fixes longer than five years are also available, with some going all the way up to 15 or even 40 years – though these are uncommon as borrowers cannot always ‘port’ their mortgage to another property if they need to move.
Mortgage jargon explained
To get the best deal, borrowers can ‘fix’ their mortgage for a certain amount of time, usually two or five years.
They agree to lock in a certain interest rate for that period, meaning their monthly payments cannot change until it finishes.
Signing up to one of these deals might also mean paying an arrangement fee, which should be factored into the total cost of the mortgage over the deal period.
But if they need to exit the deal early, for example if they want to move home or become mortgage-free, they might end up paying an Early Repayment Charge (see below).
Alternatives to a fixed deal are a tracker or variable rate, or staying on their lender’s Standard Variable Rate – though these will probably end up being more expensive.
The loan-to-value of a mortgage refers to how much money the homeowner is borrowing, relative to how much their property costs to buy.
Take this example: a couple is buying a house worth £200,000, and they have a deposit of £50,000, or 25 per cent of the total property cost.
This means they are borrowing three quarters of the property’s value – so their loan-to-value is 75 per cent.
Standard Variable Rate (SVR)
This is a bank or building society’s ‘default’ mortgage rate, which homeowners drop on to when their fixed-term deal ends, if they do not remortgage.
It is almost always more expensive than being on a fixed-term deal, and for those with large deposits the difference can be more than 3 per cent.
Lenders set it themselves and can change it at any time – hence being called ‘variable’ – though the level they choose to set it at is usually influenced by the Bank of England’s base rate.
One advantage of being on a standard variable rate is that borrowers can usually overpay their mortgage, or repay it in its entirety, without a penalty.
Banks also offer tracker mortgages. These ‘track’ the Bank of England’s base rate, which is currently 0.1 per cent, plus a certain percentage decided by the bank.
For example, a borrower might choose a deal which charges the base rate, plus 1.75 per cent, for two years.
At the moment this would mean they paid 1.85 per cent – but if the base rate increased, so would their monthly payments.
As the base rate is very low and likely to increase rather than decrease, a tracker does not make sense for most homeowners right now.
However, like a Standard Variable Rate, trackers also usually come with lower penalties for repaying early or overpaying, so it may work for those who are keen to do this.
Early Repayment Charge (ERC)
An Early Repayment Charge is the fee a borrower pays for repaying their fixed-rate mortgage in its entirety before they reach the end of the deal term.
These fees are commonly around 5 per cent of the mortgage amount, though some banks decrease the percentage for each year of the fixed term that elapses.
There are often also limits on how much a borrower can ‘overpay’ their mortgage – which means paying more than their set monthly charge in order to clear their mortgage more quickly.
Overpayments are often capped at 10 per cent of the total mortgage amount, per year. If a homeowner exceeds this, they will face a fee.
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