Jim Kersey
Holly Bennett
A remortgage is when a property owner moves their mortgage to a new lender or switches to a different deal offered by their current lender.
When interest rates are low, lenders offer attractive remortgage deals. These might be tempting if you have had a mortgage for a while and want to save money on your monthly repayments.
But you will need to take a close look at your own finances and your current deal to know if it’s the right time to switch. Crucially, this includes checking for any early repayment charges for leaving your current agreement before the tie-in period ends, as well as any charges and fees you’ll pay for the switch.
Why remortgage?
You might remortgage because your fixed deal is nearing its end and you want to avoid going on to your lender’s standard variable rate (SVR).
Or perhaps you want to release equity and free up capital from your property for home improvements. Or maybe you’re just after a more flexible mortgage, such as one that offsets your savings, lets you make overpayments or allows payment holidays.
There are wider factors at play, too. Concern that interest rates may rise in the near future may make you want to lock in a low rate with a fixed-term deal.
Whatever the reason, taking the time to research and make preparations can help you access the best deals, along with following the steps below.
» MORE: How remortgaging works
Research your options
You can remortgage with your current lender or approach a new bank, building society or other specialist provider. You can approach them directly or through a mortgage broker.
It may sound obvious, but to improve your chances of getting the best rates, it’s worth taking the time to compare deals between lenders. This may take weeks and involve a few calculations, but what you’re choosing is important. So, ideally, set aside some time at least three to six months before your current deal is due to end.
Switching deals with your current lender, known as a product transfer, will usually be more straightforward. But also checking with other providers may mean you access more favourable rates.
Check your credit score
Your credit report contains information about your past credit cards, loans, overdrafts and regular bills. Your new lenders will run a credit check to estimate if you will be able to repay your mortgage. The result will affect the remortgage deals you can access.
The credit report can help show your history of paying off debt, including your current mortgage, over the years. So it can show lenders if you’re a reliable prospect.
A strong credit score will convince lenders that you have what it takes to pay back the mortgage and could open up better deals. A weaker score may mean that you have a more limited range of options to choose from.
» MORE: Ways to improve your credit score
Time your application right
When you make a full application and it’s accepted, you will need to pay any fees and charges for the new deal, such as arrangement or booking fees. Your lender will also carry out a thorough check of your credit history. As a number of hard credit checks in a short space of time can harm your credit score, you’ll want to limit how many mortgage applications you make.
Lenders will offer an agreement in principle, which will let you know whether you are likely to be accepted, before you actually apply. This will be valid for a certain period of time, which can vary across lenders, so check what timeline you’ll need to work to. You may end up finding a better deal after some more research, so don’t commit too early.
Picking the right switch date is also crucial if you are looking to avoid an early repayment charge (ERC) with your current lender for leaving their deal before it is due to end.
» MORE: Is it the right time to remortgage?
Check the small print
For all its possible benefits, remortgaging isn’t always the best option for everyone.
If you have ERCs attached to your current mortgage, these charges will kick in if you remortgage before the lender’s tie-in period ends. This may even stretch beyond the end of the deal’s term, such as a few months after five years of a five-year fixed deal.
Ask your broker or lender what potential penalties you might face for early repayment, so you don’t have any nasty surprises later on.
You should also factor in fees or charges you might have to pay to secure your new deal. You may be asked to pay set-up and admin fees, along with conveyancing and valuation fees, though some lenders will offer a fee-free switch. If you are moving to another deal with your current lender, legal and valuation fees may not apply, but any ERC will.
Take all these factors into account before assuming you will save more money with the new mortgage than it will cost you to get out of your existing one.
» MORE: The difference between a variable and fixed-rate mortgage
Decide how much you want to borrow
If you’re making no changes and are simply transferring your loan from your current provider to a new one, or to another deal with your current provider, what you borrow will stay the same.
When you’re using online mortgage calculators, have the exact details of your current deal to hand, and the figure you are looking to remortgage for. This includes the remaining mortgage term and the outstanding loan amount, as well as how much you pay each month.
You will also need to find out the best date to switch before you set any wheels in motion. Contact your lender if you’re unsure about any of this.
To decide what they can offer you, lenders will look at your finances, including your salary, bonuses or commission, investments, regular bills and outgoings, as well as any debts you have, to work out how much you can afford. They will also consider the amount of equity you have in your home, the mortgage term and your age.
If you’re looking to borrow more than your current lender will offer, you might decide to try another lender. If your home has gone up in value since you first took out your mortgage, you may be considering releasing some of the equity to put towards other expenses that have cropped up, such as home renovations. You will need to tell the lender what you plan to use the extra money for.
But don’t assume you’ll get the headline offers for the sum you want before you actually run through your personal circumstances with your potential new lender.
Using your mortgage to access finance may not be the cheapest way to borrow and will mean paying back more in the long run. So it’s a good idea to talk to a mortgage adviser before increasing your loan amount.
» MORE: Remortgaging to release cash from your home
Work out your LTV
Your loan-to-value (LTV) ratio is the size of your mortgage in relation to the value of your property. The lower your LTV is, the less risky it is for the lender to offer you a loan against your property. The larger the amount of equity you have and the lower your LTV, the better deals you will be able to access.
To find out yours, divide the amount you owe on your mortgage by your home’s current value. Multiply by 100 and you will get your loan-to-value percentage. For example, if you owe £150,000 and your property is worth £300,000, your LTV will be 50%.
Find out your property’s value
Check how much your property is actually worth. You can research the price of similar homes in your area online to get an estimate, or ask an estate agent for a valuation. This will form the basis of your discussion with potential lenders who will use their own independent valuers.
The lender will use the confirmed valuation to work out which LTV band you are in, which may affect the rate it offers you.
If your property’s value has dropped since you took out your original loan and you move to a less favourable, higher LTV band, you may decide to wait until prices are back on the up before you remortgage. Otherwise, you’ll have a higher LTV than your original mortgage was based on.
The chances of a deal for a higher LTV being better than your current one are slim, so keep an eye on the market and make your approach to new lenders when the time is right.
Get your paperwork ready
If you’re remortgaging, especially if it’s with a new lender, be prepared to provide the same information you produced when you bought your property.
This might include recent:
- payslips
- bank statements
- P60 tax statement
- proof of bonuses or commission
- business accounts or tax returns if you’re self-employed
You may also be asked for proof of identification if you’re changing providers. Ask the lender or your broker what paperwork you’ll need, so you’re prepared and don’t cause any delays while you’re digging out the documents from various sources.
Should you remortgage?
If interest rates are low and there are signs they may soon be on the rise, it could be a good time to consider remortgaging to reduce, or fix, your monthly payments.
But whether or not it’s right for you will also depend on your financial circumstances, what you want from your mortgage, and when you might face fewer exit fees for leaving your current deal.
Try to spend as much time choosing a remortgage loan as you did when you first took out your mortgage, and always factor in fees and charges to make sure it’s worthwhile.
Image source: Getty Images
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