A Simple Guide to Remortgaging
A remortgage lets you save money or tap into new equity by switching your current mortgage to a new one.
Remortgaging offers homeowners the chance to save on their monthly bills or raise some money.
By switching to a new deal – with their current lender or a new one – that offers a lower interest rate, homeowners can reduce their monthly repayments.
Alternatively, by borrowing more than they currently owe, homeowners can get a cash injection to cover any large expenses they might have 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 whether mortgage lenders think you can afford to keep up with repayments.
When should I remortgage?
There are lots of reasons and triggers for remortgaging. For instance, you might be concerned that mortgage rates are rising and want to lock into today’s rates before they go up. Alternatively, rates may have fallen since you got your mortgage and you may want to take advantage of a cheaper deal.
Or perhaps you’d like a further advance to help pay for home improvements – this involves increasing the size of your mortgage and getting a lump sum to pay for the building work. Some homeowners meanwhile may raise money to pay off other more expensive debts.
If the value of your home has risen since you bought it, you could be eligible for a mortgage with a lower rate. Mortgages are priced depending on the loan to value– the percentage of the property’s value that you are borrowing to purchase it. The higher the LTV, the higher the interest rate. Many first-time buyers need the most expensive 90% LTV loans as they can only put down a small deposit. However, after a few years of mortgage repayments and if property prices have also risen, the amount of equity you hold in your property may, for example, have increased to 20% – making you eligible for cheaper 80% LTV loans.
You may also wish to remortgage to a deal that offers you greater certainty by having a longer fixed interest period, say five years instead of your current mortgage’s two-year fix. You may even want the exact opposite – if you no longer want to be locked into a lengthy fixed rate period, you may prefer to remortgage to a home loan that has a shorter fixed rate or one that varies according to interest rate movements.
However, the main reason homeowners remortgage is that they come towards the end of their lender’s fixed rate or discounted period. This is usually two or three years into the mortgage term when the interest rate reverts to the lender’s standard variable rate (SVR), which is higher and leads to an increase in monthly repayments.
Why might it be the wrong time to remortgage?
When you apply for a remortgage, your affordability will be scrutinised. And there are strict rules lenders must follow when deciding whether to let you borrow money.
If your financial circumstances have deteriorated since you last applied for a mortgage you may struggle to find cheaper rates and you may not be offered a remortgage at all. For instance, if your income has fallen, your credit score has dropped or your property price has dropped, then remortgaging can be difficult.
Lenders are also reluctant to extend mortgage terms for older borrowers and can insist on you repaying more of your loan each month so that your debt is cleared before you retire.
And it’s important to realise that not all mortgages can be switched or “ported” to another property. So, if you plan to move in the near future, you need to find out whether your remortgage could move with you.
How does remortgaging work?
If you stick with the same provider, you get a new deal with a different interest rate so not much will change other than the amount you repay each month.
And if you switch lenders, then effectively the new lender pays off your old mortgage and your debt transfers over.
Switching mortgage providers will require more work and possibly fees so always factor this into your decision. Always check with your existing lender first to see whether it can offer you a more competitive home loan too.
How do I remortgage?
Whether you switch to a new lender or stay with your existing one, you’ll need your recent financial information to hand. You’re likely to need proof of income in the form of your last three months’ payslips, or your past few year’s tax returns if you’re self-employed. You’ll also typically need to share your last three months’ bank statements and your latest P60 tax form (showing your income and tax paid from each tax year). And if you’re applying for a joint remortgage, you’ll need this information for both of you.
The next step is to find out which remortgage deals you may be eligible for, which as well as your affordability largely depends on your LTV. This is the proportion of your home’s value the mortgage represents. Typically, the more you own (usually referred to as the amount of ‘equity’ you have), the less the loan will cost you.
To find mortgage deals, you can visit mortgage lenders’ websites and use their mortgage calculators. However, it may be wise to widen your search by using a comparison website or engaging a mortgage broker who can scour the market for the best home loans for you. Once you have found the right deal, you can apply directly through the comparison site or if you are using a broker they will put in your application for you.
Once the lender has all the information it requires and everything is in order, the remortgage completes and you start making your new repayments.
How long does it take to remortgage?
The whole process can take months so you should always consider your remortgage options at least three months before your existing deal is due to expire.
How much does it cost to remortgage?
While the main cost of remortgaging depends on the interest rate your lender sets, it’s really important to consider all the fees that may also be charged as they can soon mount up.
Types of remortgage fees include:
- arrangement fees for getting the mortgage.
- legal fees.
- admin fees for setting up the new mortgage.
- early repayment fees if you leave your old lender or deal before you were meant to.
- exit fees.
Always find out exactly what fees you’ll have to pay before deciding on the remortgage deal you want to apply for.
Can I remortgage early?
If your mortgage is still in its initial discount period and you remortgage during this period, you’ll be charged a penalty known as 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 whether remortgaging is right for you at present.
Can I 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. In some cases, you may struggle to get a new mortgage at all.
Always find out what your current credit score is before applying for a mortgage, and if it’s not good then do everything you can to improve it. Paying off any debts you have and making sure you are on the electoral register can boost your score.
Mortgage brokers and debt advisers can help identify lenders and products that may be suitable for your needs. Brokers will either charge a fee for their services or offer free advice but take a commission from the lenders they recommend. For free debt advice look for charities including National Debtline and StepChange.
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Laura Whitcombe is a freelance journalist, campaigns consultant and co-author of Money Made Easy 2015/16 published by Harriman House. Read more