How Does Remortgaging Work?
Remortgaging can help you save money or tap into equity. Here’s why timing is important and what’s essential to consider before switching to a new deal.
Remortgaging a property can save you money on mortgage payments or let you raise some money without selling up.
By switching to a new deal that offers a lower interest rate, with your current lender or a new one, it’s possible to reduce your monthly repayments.
Remortgaging can also let you borrow more than you currently owe. This can give you a cash injection to cover any large expenses or to consolidate other debts.
The remortgage deal you will get and how much you can borrow depends on the amount of equity you have in your property, and if mortgage lenders think you can afford the repayments.
What is a remortgage?
A remortgage is when you move your mortgage to a new deal with another lender, or move to a different deal with your current lender.
Switching to a new interest rate with your current lender is known as a product transfer, and not much will change other than the amount you repay each month.
If you remortgage with a different lender, the new lender effectively pays off your old mortgage and your debt transfers over to them. This will usually involve more admin and additional fees, which you’ll need to factor into your calculations.
Shopping around can help you get the best deal, but also check if your existing lender can offer you a more competitive deal than the one you are currently on.
When should you remortgage?
The main reason homeowners remortgage is because they are reaching the end of their lender’s initial fixed rate or discounted period and they want to save money. This is usually two to five years into the mortgage term, when the interest rate reverts to the lender’s standard variable rate (SVR), which is generally higher and will cost you more each month.
While the potential to save money every month is a common motivator, there are other possible reasons and triggers for remortgaging. These range from wider economic factors to changes in your financial circumstances, such as:
- You want to lock in today’s interest rates, as you’re concerned about future rises.
- Interest rates have fallen since you first got your mortgage, and you want to take advantage of a cheaper deal with a lower interest rate.
- You plan to release equity from your property to help pay for home improvements or other large expenses.
- You want to remortgage to pay off other debts. If you’re considering this, talk to a financial adviser or a debt adviser before going ahead.
- Your property has gained in value over time and after a few years of mortgage repayments you own more equity, which means you can access lower loan-to-value (LTV) deals and better rates.
- You prefer to switch to a longer fixed interest period for peace of mind, perhaps five years instead of your current two-year fix.
- You no longer want to be locked into a lengthy fixed-rate period and would prefer a shorter fixed rate, or one that varies alongside interest rate movements.
- You would like to move to a more flexible mortgage that takes account of your savings, such as an offset mortgage, or allows you to make overpayments without penalties.
If you’re looking to remortgage, don’t leave it until the last minute – ideally, give yourself three to six months before your deal ends to consider your options and shop around.
If you’re not sure if it’s right for your situation, or when to do it, a mortgage adviser can help.
When shouldn’t you remortgage?
Remortgaging isn’t always the right option. If your financial situation has worsened since you applied for your existing mortgage, or if your property has dropped in value, you may struggle to find cheaper remortgage rates. If your income has fallen or your credit score has dropped, remortgaging might be difficult.
This is because, just like when you first took out a mortgage, when you apply for a remortgage, a lender will assess your affordability. There are strict rules lenders must follow when deciding whether to let you borrow money.
Lenders are also reluctant to extend mortgage terms for older borrowers. But even if remortgaging to extend your term isn’t possible, you may still be able to find a remortgage deal that costs you less.
It’s also worth knowing that not all mortgages can be ported to another property. So if you plan to move in the near future, find out if your remortgage could move with you.
If you remortgage before your current deal ends and during the lender’s tie-in period, you will likely have to pay an early repayment charge. This is a percentage of the remaining mortgage debt which usually reduces over time, meaning you pay less the later you leave. As this can run to thousands of pounds, it makes sense to check your current provider’s terms so you’re clear about their charges and what you would pay to exit at this stage.
If you only have a small mortgage left to pay off, you may find that some lenders have a minimum loan amount, usually £25,000, that they will accept as a remortgage.
How to find remortgage deals
First, research which remortgage deals you may be eligible for, which, as well as the affordability of the loan, largely depends on your LTV. This is the proportion of your home’s value the mortgage represents. Typically, the more you own, which is the amount of ‘equity’ you have, the less the loan will cost you.
You can use remortgage calculators on lenders’ websites to see how much you might save on a different deal. Have the figures ready for how much is left to pay on your mortgage, what you currently pay monthly and what your property is worth, along with the initial rate term you are looking for.
For more options and potentially better rates, you can widen your search by using a comparison website, such as NerdWallet, or a mortgage broker who can scour the market for you. You can apply directly through the comparison site or if you are using a broker, they can put in the application for you.
» COMPARE: Remortgage deals
How to remortgage
Whether you switch to a new lender or stay with your existing one, it is likely you’ll need to have your recent financial information to hand when you apply. This will include:
- payslips from the last three months as proof of income
- tax returns from the last few years if you’re self-employed
- bank statements from the last three years and your latest P60 tax form
If you’re applying for a joint remortgage, you will need to provide this information for both of you. You will also need to show proof of ID and address.
If you are staying with your existing lender and just switching deals, it is a more straightforward process than if you’re remortgaging with a new lender. This is provided you aren’t also making changes to your mortgage, such as borrowing more. A straightforward product transfer won’t usually involve as much admin.
Once the lender has all the information it needs and everything is in order, it will approve the remortgage and you can start making your new repayments.
How long does a remortgage take?
The whole process can take around two months, but it may take longer, depending on whether or not all the paperwork is in order.
So it makes sense to start researching your remortgage options and apply three to six months before your existing deal is due to expire. In most cases you are able to secure your new deal in advance of your old one coming to an end, so that the mortgage can seamlessly switch at the point the old deal expires.
What remortgage costs are there?
While the main cost of remortgaging depends on the interest rate your lender sets, it’s important to consider all the fees that may also be charged, as they can soon mount up.
Types of remortgage fees for the lender you are moving to include:
- arrangement fees for getting the remortgage
- legal fees for using a conveyancing solicitor
- valuation fees for the property
- admin or account fees for setting up the new mortgage
For the lender you are leaving:
- an early repayment charge if you leave your old lender or deal before it’s due to end
- exit fees, or closure fee, for transferring the loan to a new lender
Find out exactly what fees you’ll have to pay to your current and future lender before going ahead with a remortgage.
Can you remortgage early?
If your mortgage is still in its initial discount period and you remortgage during this time, you are very likely to be charged a penalty called an early repayment charge.
This can be a significant cost – easily thousands of pounds. So before you remortgage, find out if this charge will be made, how much it is and when it applies until. Once you have these answers, you’ll be able to work out the best timing for you.
Can you remortgage with bad credit?
The better your credit score, the easier it is to find good mortgage deals. The worse your score, the fewer you will have to choose from and the more you could have to pay in interest and fees. You may even struggle to get a new mortgage at all.
However, there are bad credit mortgage lenders which specialise in helping people who are struggling to get a mortgage from mainstream lenders.
If your credit situation is particularly bad, remortgaging with your current lender might be your first option, especially if you have met your repayments and you’re not looking to make changes to your mortgage, aside from moving to a better deal. Moving to another lender isn’t impossible, but you will be treated like any other new mortgage customer and will have affordability checks.
Find out what your current credit score is before applying for a mortgage as, if it’s not good, there are steps you can take to improve it. Paying off any debts you have and getting on the electoral register can boost your score.
Mortgage brokers and debt advisers can help identify lenders and products, which might be right for you. Brokers will either charge a fee for their services or offer free advice but take a commission from the lenders they recommend. Charities such as National Debtline and StepChange can offer free debt advice.
» MORE: How to improve your credit score
Image source: Getty Images