The Christmas decorations are down and the pine needles vacuumed up. If you are contemplating a spring clean, don't forget to freshen up your finances. As your biggest commitment, it's crucial to ensure that your mortgage is not collecting dust. Despite low interest rates, millions of homeowners are content to throw good money after bad by staying put with an uncompetitive mortgage. If you have not reviewed your home loan in the last 12 months then the chances are you are just lining the pockets of lenders.
1336 good reasons why
Homeowners are three times more likely to shop around for car insurance than think about how to switch to a better deal on their biggest financial commitment, according to the Department of Trade and Industry. And figures from lender GMAC-RFC reveal some startling facts. Over half of the UK's 17 million mortgage holders do not even know the current rate of interest on their mortgage. Little wonder then that one in 10 borrowers are missing out on £1,366.32 a year by not remortgaging. This makes for a staggering £2.4 billion wasted each year by people not shopping around.
Interest rates have halved in the last five years but after the last cut, only 16 out of 78 lenders passed on the full 0.25% cut to their borrowers. If you want to move to a lower rate and reduce your monthly payments, don't expect your lender to prompt you.
The discount trap
It's not just standard variable rates that drain your bank balance. If you opt for a discounted deal then make sure you review it promptly. Latest estimates from the Council of Mortgage Lenders are that discount mortgages account for a third of all mortgages sold – with the most popular deals offering discount periods of 2 years or less. But borrowers on these deals need to remortgage to a new deal within just 14 months of rolling onto the high ongoing rate, or all the value gained by taking the discount is destroyed. By holding onto the same mortgage for the current average of 5 years, they would pay £1,840.56 more in interest than a homeowner choosing a mortgage with a rate that is consistently no higher than 1% above the Bank of England Base Rate, according to figures from Egg.
'For committed switchers traditional discount mortgages make real sense,' explains Andy Deller of Egg. 'However with the current level of apathy among the majority of borrowers, they are likely to end up significantly worse off than if they had chosen a mortgage with a low long term standard rate. These borrowers would be better off looking for discount deals with slightly shorter discount periods that lead into cheaper ongoing rates.'
Take a fresh look
"The British are throwing money down the drain by not reviewing their mortgage,' says Gina Collman of GMAC-RFC. 'Just because a mortgage seemed a good deal when you took it out does not mean it still is now. New rates and deals are becoming available all the time and with interest rates now so low it is often even worth paying redemption penalties to remortgage. Why pay more than you need to in interest when there are much better rates available?,' she adds.
Jim Spowart of Intelligent Finance agrees: "Choosing a mortgage is the single biggest financial decision we make, but homeowners shouldn't view it as a one-off decision. Those who 'buy and forget' will likely end up losing thousands of pounds."
How to clean up in six steps
ONE: Decide what you want to get out of your mortgage review - do you want lower monthly payments, the security of a fixed rate, a capital sum for a holiday or home improvements, flexibility, or debt consolidation?
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TWO: Check your existing mortgage - what's your current mortgage rate? How much do you pay each month? Are you are tied into any fixed-rate or discounted deal and for how long? Check you are not going to be subject to a penalty.
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THREE: Get a redemption statement - Ask your current lender for a written redemption statement which will show the exact outstanding balance of your loan, the remaining term and any fees or penalties you'll be charged for redeeming your mortgage.
FOUR: Shop around among other lenders for a better deal. It's advisable to collect and compare information from at least five lenders but you can get an independent broker to scour the market for you. When comparing the savings you would make on different deals, look behind the headline rate and monthly payments on offer. Ask for details of the up-front costs and if the deal means paying for any compulsory insurances.
FIVE: Decide if you want to stay with your existing company - once you have gathered the information, you will be in a strong position to go back to your existing lender. Lenders do not always make re-mortgaging easy for their own customers. Many refuse to offer the best deals to customers who want to re-mortgage rather than move house, saying the latter have more expenses. Only when customers threaten to take their business elsewhere do some relent and reveal their best "under the counter" deals.
SIX: Gather together your paperwork – depending upon whether you stay with your own lender or move lenders, you will need proof of ID, residence and income. You will also be asked for one year's mortgage statement, between one and three months' payslips, and between one and three months' bank statements, a P60 certificate of pay and tax deducted and sometimes an employer's reference. Being prepared means you can start saving as soon as possible.
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