Get paid £25,000 to remortgage
Mortgage borrowers could have as much as £25,000 of their loans written off if they agree to move to a new lender.
Several specialist mortgage banks are so desperate to get rid of borrowers and wind down their lending operations that they are prepared to pay off customers as part of their remortgaging plan.
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The list includes GMAC, the 10th largest lender in the UK. Part of ailing US car giant GM, the company issued £10bn in loans in 2007, and is now targeting around 400 borrowers that could not previously afford a larger deposit.
Lenders are currently restricting remortgages to borrowers with a level of equity in their homes, known as loan to value (LTVs). Many borrowers’ home equity has been wiped out by falling house prices, making them an unattractive proposition for other lenders. Latest figures show that one in ten homes in the UK are in negative equity – a term used when the value of a property is less than the value of the mortgage attached to it.
GMAC is offering to reduce its loans by as much as £25,000 in order to help customers move elsewhere. It will also waive any fees normally associated with exiting a mortgage early. Jeff Knight, marketing director at GMAC, said: “This is currently just a pilot but are contacting borrowers who have a good credit history and could remortgage away if their LTVs were smaller.”
Although just one of its borrowers has so far successfully managed to find a new deal elsewhere, GMAC said it was confident that by August more of those taking part in the pilot will have benefited. It is willing to pay off customers because at present it is having difficulty securing funding from other banks because of concerns over the number of potentially toxic, or “sub-prime” loans on its books. GMAC stopped lending to new borrowers at the end of 2008
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“This is good for our borrowers and good for us, as it puts us in a stronger financial position,” Knight said.
Borrowers taking part in the scheme are being advised to speak to their mortgage broker to see if they could benefit from moving their loan to another lender.
Elsewhere, Bristol & West, which is part of Bank of Ireland, has offered to waive the early repayment charges (ERCs) of around 1,500 of its borrowers if they leave their current mortgage deal and move to another bank or building society.
Audrey Nolan, spokeswoman for Bristol & West, commented: “Customers are being offered the opportunity to have an independent mortgage review with London & Country, which provides free, impartial advice as to the best mortgage options available in the marketplace. Customers who do not wish to take up the offer will remain with Bristol & West as normal.”
The lender stopped selling new loans through brokers in January this year.
Edeus and Advantage, two other specialist mortgage lenders which were both funded by American investment banks during the height of the mortgage market in 2007, are offering similar deals to their outstanding mortgage borrowers. One borrower with Advantage is understood to have had their mortgage cut from £88,000 to £63,000, according to The Daily Mail.
The borrower had already tried to remortgage but were refused because they did not have enough equity. In a more typical scenario, said The Mail, someone with a £95,000 mortgage on a property worth £100,000 is being offered £15,000 written off their debt if they remortgage elsewhere.
Could you save money by leaving your mortgage early?
Even for borrowers who haven’t been offered money to remortgage to a new lender, there are opportunities to reduce your mortgage costs by leaving your current deal early.
Most mortgage lenders will hit you with a fee if you leave your deal within the discount period, which is normally a percentage linked to the outstanding mortgage balance. For this reason, most people wait until their discount period ends – this can be after anything from two to 25 years.
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However, with new mortgage rates looking surprisingly attractive at the moment, brokers say it might be worth stumping up the fee. Ray Boulger, senior technical manager at John Charcol, said paying your lender’s ERC in order to get a cheaper rate could be viable for some borrowers, but the sums involved can be difficult.
“If you need to borrow more than 70% or 75% of your property’s value then it probably isn’t worth it as rates for people with low equity stakes aren’t competitive enough,” he said, adding that how long your discount period has left to run is also important: “If you’re in the last year of your fixed rate and the ERC is a flat rate throughout the whole period, then it’s probably not worth moving.”
One exception is if you are in your final year of your fixed period and your ERC decreases each year. Boulger added: “If your mortgage is relatively low then it could be worth moving even if you are in your final year – just make sure you get professional advice first.”
While it is worth speaking to a mortgage broker before you opt to leave your mortgage early, there are some simple mathematical points to consider that should give you an idea of whether it would be worth it financially.
First off, find out what the cost of your ERC will be. Then, unless you have cash to pay this to hand, add this amount to the outstanding debt on your current mortgage. This will, of course, increase the amount of interest you pay back over the term.
Calculate how much your new mortgage repayments will be and work out what the monthly saving is. Calculate how many months it will take before this monthly saving is equal to the ERC you paid.
Another important point to bear in mind is that you might have to pay additional fees to close your mortgage account, and could also face fees from your new lender. Most lenders charge an account closing fee, which can range from £125 to £250. You can find out exactly how much this will be by contacting your lender or by checking your original loan offer.
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Matt Andrews, managing director of Money Workout, said: “Look at the fees your new lender will charge you – such as booking/arrangement fees. Most lenders will waive valuation and legal fees, but if not then this cost must be factored in.”
Consumers should first of all work out how much they would save in monthly payments over the term of the new deal. The ERC and any additional fees should then be subtracted from this figure. The number leftover will either be a saving or a loss.
