Time To Switch Your Mortgage ?

THERE is an old joke that Christmas is so expensive you need a mortgage to pay for it, but this is not as far-fetched as it sounds. For hard-pressed homeowners paying their lender’s standard variable rate (SVR), who have also amassed credit card debt in the run-up to Christmas, helping to pay for the festivities is yet another incentive to remortgage.
Morgan Stanley estimates that Britons spend an average of £940 in the run-up to Christmas. If most of this is on credit cards, there will also be interest to pay. This can be as much as 30 per cent on store cards, but more usually it is about 15 per cent.

Adding credit card debt to your home loan can reduce your monthly outgoings. For instance, a debt of £5,000 on a credit card that charges

14.9 per cent would cost £125 a month, assuming that the borrower pays the minimum of 2.5 per cent. If this debt was transferred to a mortgage that charges a lifetime tracker rate of 4.74 per cent, the monthly payments would drop to £28 and the total interest paid would be nearly £800 less over 25 years.

Bear in mind that if the debt stayed on the credit card, the payments would gradually fall as the capital was repaid.

Simon Tyler, of Chase De Vere Mortgage Management, the broker, says: “Even in the worst-case scenario, it would be cheaper both in the short term and the long term to add the credit card debt to your mortgage — though clearly it would be better to overpay to reduce that extra debt as quickly as possible.”

But bear in mind that there are risks and you should exercise caution before you transfer unsecured debt to a debt secured on your home.

Ray Boulger, of John Charcol, another broker, says: “It can be a sensible option for credit card users who pay off their debt in full each month, but serial abusers of credit facilities should not see it as a soft option. They will still need to exercise discipline to meet their monthly payments.”

If all you want to do is reduce your monthly costs, Mr Boulger suggests simply switching to a lower mortgage rate and using the savings to pay off credit card debt.

You should also consider why you need to consolidate. If you face a one-off loss of income, perhaps because you are having a baby or are temporarily unemployed, there is less danger of future problems.

But Mr Boulger adds: “If you are remortgaging because you cannot meet your existing mortgage payments, then you will need to budget very carefully, or maybe extend the mortgage term, to avoid the risk of an impaired credit record.”

James Cotton, of London & Country Mortgages, another broker, recommends keeping a note in your diary of when your present deal ends. He says: “Be well prepared and start arranging a new mortgage a couple of months before your deal, and any early repayment charges (ERCs), finish.”

Even if you do not have Christmas credit card debts, remortgaging away from an SVR still makes sense. Some borrowers may be delaying plans to remortgage because of rumours that there will be a cut in the Bank of England base rate next year. The response from brokers is to “get on with it”. Mr Boulger says: “If you wait until February, you will be paying 2 per cent over the odds for the next two months. You would probably not recoup from the rate drop the money that you lost over that period. If you switched to a variable rate, you would benefit from a rate cut anyway.”

Don’t be put off by the costs involved in switching. On competitive deals, these pay for themselves within a few months, although this does depend on the loan size.

Many deals are fee-free or offer incentives such as cashbacks, but the Mortgage Advice Bureau gives warning that this usually means that the fees have merely been costed into the interest rates so it may not actually be cheaper.

Switching from a rate of 6.5 per cent to a two-year fixed-rate of 4.49 per cent from Skipton Building Society would save £183.31 a month. Mr Cotton points out that this is a saving of £2,200 a year, which is equivalent to a pay rise of £2,800 for a basic-rate taxpayer, or £3,600 if you pay higher-rate tax, because the mortgage saving is net of income

Financial Crisis Centre Myvesta UK assert that switching mortgage products to obtain a more competitive rate is an essential component of a holistic Debt Management Strategy. The Not-For-Profit organisation offers a Mortgage Switching Service that looks for ways that individuals can maximise incomes by obtaining better deals within the marketplace.