Remortgaging
Your fixed rate is ending: when and how to remortgage
Hundreds of thousands of fixed-rate deals end every year, and many borrowers coming off them are moving from rates set when borrowing was cheaper. The good news is that remortgaging is one of the few money decisions where a couple of hours' work reliably saves thousands. Here is how to think it through, using one example.
The example
You owe £180,000 with 20 years left. You are on a 3.89% fixed rate that ends in four months, paying £1,080 a month. Your lender's standard variable rate (SVR) is 7.24%. Your home is worth about £320,000.
1. The cost of doing nothing
When a fixed deal ends, you move to the lender's standard rate unless you arrange something else. In the example that would take the payment from £1,080 to £1,416 a month, a jump of £336.
A new two-year fix at 5.36% with no fee would cost £1,222 a month instead. Sitting on the standard rate would cost about £195 a month, or roughly £2,300 a year, more than switching. That is the single most important number in this article: drifting onto the standard rate is almost always the expensive option.
2. When to act
Most lenders let you secure a new deal up to six months before your current one ends, and the offer then holds until you need it. So you can lock in a rate early and, if rates fall before your switch date, often move to a cheaper deal without a penalty. Starting the search about six months out gives you time without any downside.
Put the end date of your deal in your calendar six months early. It is the easiest money you will make this year.
3. Switch early, or wait for the deal to end?
Leaving a fixed deal early usually means an early repayment charge, often 1% to 5% of the balance. Comparing the options over the same period, the four months left plus a new two-year deal, and counting interest, fees and charges:
| Option | Cost over 2.3 years |
|---|---|
| Do nothing (3.89%, then 7.24% standard rate) | £27,503 |
| Switch when the deal ends (to 5.36%) | £20,862 |
| Switch now, no early repayment charge | £21,775 |
| Switch now, with a £3,600 charge | £25,375 |
Here, switching early makes no sense: your current 3.89% is cheaper than anything on offer, and an early repayment charge only makes it worse. Switching early only pays when your current rate is much higher than new deals and the charge is small, which is rarer than people think.
4. Your home's value may have changed your options
Lenders price deals by loan to value (LTV): what you owe as a share of what your home is worth. You have paid off some of the loan since you bought, and your home may have gone up in value, so your LTV is probably lower than when you first borrowed. In the example, £180,000 on a £320,000 home is 56%, inside the cheapest 60% band.
Get an up-to-date idea of your home's value before you compare deals. Being just over a band edge, say 61% instead of 60%, can cost you a higher rate on the whole loan, and a small overpayment before you switch can sometimes bring you under it.
5. Stay with your lender, or move?
You have two routes:
- A product transfer with your current lender. Usually quick, often no valuation or legal work, and normally no affordability check if you are not borrowing more. Good if your circumstances have changed, for example a new job or lower income.
- A remortgage to a new lender. More paperwork and a credit check, but you can pick from the whole market, and many lenders offer free legal work and valuations to win switchers.
The sensible move is to get your current lender's product transfer offer and compare it with what other lenders advertise. Product transfer rates are not always the cheapest, but they are not always the most expensive either.
6. Fee or no fee?
On a £180,000 loan, a 5.09% deal with a £999 fee costs about £27 a month less than a 5.36% deal with no fee. It takes about 37 months to win the fee back, longer than a two-year deal lasts, so over the two years the no-fee deal comes out around £350 cheaper. On bigger loans the sums often go the other way, so always compare the total cost over the deal, not just the rate.
A remortgage checklist
- Find your deal's end date, current balance and any early repayment charge (all on your annual statement).
- Check your lender's standard rate: that is the cost of doing nothing.
- Estimate your home's value and work out your LTV.
- About six months before the end date, compare your lender's offer with the wider market.
- Compare deals on total cost over the deal, including fees.
- Lock in a deal, then keep an eye on rates until it starts.
Run your own numbers
The remortgage calculator does all of this for your mortgage: it shows what staying on the standard rate would cost, compares switching when your deal ends with switching now, and lists remortgage deals for your loan to value. If you are not sure what your home is worth, it can fill in the local average for your area and type of home.