Remortgaging route can lose the unwary

REMORTGAGING is a booming business, as homeowners take advantage of cheaper loans created by the lowest interest rates in 48 years, but industry experts warn there are pitfalls to the process.

Total mortgage lending was £21.5 billion in May, while credit card lending reached a new high of £506 million, according to the Council of Mortgage Lenders.

CML said the strong rise in home loans was driven by people remortgaging, which now accounts for 51 per cent of total lending.

But Lisa Hutchison of Wylie & Bisset, the independent accountancy firm, says remortgaging is "a bit of a minefield and no place for the unwary".

She says: "Firstly, it’s essential to find out if you can change your mortgage without being charged a penalty for doing so, because penalties can apply if you change your mortgage or lender for a period after your original product benefit period is over."

Major lenders today offer attractive two-year fixed rates followed by a four-year period paying a standard variable rate where early repayment penalties are still payable.

"It is imperative to check this first, either with your existing lender direct or in the documentation it provided when the mortgage was first offered to you," Ms Hutchison says.

"While this type of product is fine in the right circumstances, it could cost if you only find this out only when your application to change mortgage is nearing settlement.

"A valuation or legal work may have already been carried out on your behalf for which you may be liable if you pull out at a late stage in the application process and your existing lender may already have charged you a fee for the release of your Title Deeds to the solicitor acting in the transfer."

Ms Hutchison says homeowners must also take care not to find themselves lumbered with other fees, such as mortgage indemnity insurance.

"This provides the lender, and the lender only, with additional security to offset any loss made on a forced or voluntary sale of your property if you are for any reason unable to meet your repayment commitments," she says.

"As for any other insurance policy, a premium is payable and the higher the lending risk in terms of mortgage amount in proportion to the value of the property the higher the premium can become, and it can run into thousands of pounds."

During May the number of first-time buyers entering the market continued to fall, accounting for just 30 per cent of all loans, down from 33 per cent in April, the CML said.

At the same time, the number of people opting for fixed rate mortgages rose to 50 per cent of all lending, the highest level since the end of 1998 and up from 27 per cent a year ago.

CML director general Michael Coogan says: "A reduction in the price of short-term fixed rate mortgages has resulted in a significant increase in the popularity of these products in recent months."

Meanwhile, the British Bankers’ Association, which measures lending by the major banks, said the increase in mortgage lending had slowed to £4.65bn during May, from an average of £5.1bn during the past six months.

But the Building Societies Association reported a rise in total lending, up from £3.14bn in April to £3.73bn last month.

Ms Hutchison says over 50 per cent of all mortgages are introduced to lenders by mortgage intermediaries, and borrowers would be well advised to consult their mortgage adviser to obtain the best deal for their circumstances.

Individual lenders usually only advise on their own mortgage products, she explains, while an independent mortgage adviser can look at the whole market to source the most suitable product.

"Shopping around may be necessary to achieve your aims," adds Ms Hutchison.