When Should You Remortgage?
You might be looking to remortgage to save money while interest rates are low, or to avoid your lender’s standard variable rate at the end of a fixed deal. Or perhaps you want to tap into equity from your home. Whatever the reason, it’s an important decision and you’ll want to time it right.
When you remortgage, you’re transferring your mortgage debt to a new deal. This can save you money by opening up better interest rates and deals more suited to you, but you’ll want to get the timing right and do your sums to make sure it’s worthwhile.
You might want to take advantage of interest rates being at an all-time low and lock in a lower rate than you are currently on. Or when interest rates change, you may want to consider whether you are missing out on more competitive deals.
If your current mortgage deal has an attractive starter rate, which is coming to an end, you might have your eye on a fixed deal to avoid being moved on to the lender’s more costly standard variable rate (SVR).
You can ask to remortgage with a new lender, or switch deals with your current lender, which is called a product transfer. A deal isn’t for your whole mortgage term; it is the initial rate of interest you pay for a set period of time, such as two to five years.
Before you go ahead with switching, be clear about the actual cost. This includes any penalties for switching before your current deal’s tie-in period ends, and any charges for setting up the new mortgage agreement.
When is the best time to remortgage?
You can usually move mortgage deals whenever you like. Whether it’s a good idea depends on a few factors, including whether you will face a penalty for leaving your current deal early.
You may feel the time is right to remortgage when:
- Your current mortgage deal is coming to an end and you want to switch before you are transferred to your lender’s more costly SVR. This is the most common reason for switching.
- Interest rates are lower than you secured with your current deal, which means you could make savings on your monthly payments. You may also want to protect yourself from imminent interest rate rises with a fixed deal, where the interest rate stays the same for that period.
- You want a more flexible mortgage, such as one that lets you offset savings you have built up to pay less interest on your loan, or allows overpayments with no penalty.
- Your house has increased in value and you have paid off a good amount of your mortgage over the past few years. With a lower loan-to-value ratio (LTV), you may be able to access lower interest rates.
- You want to raise money by releasing equity from your home for other large expenses, such as home renovations you would like to get under way. It is a good idea to check whether there are cheaper ways to borrow, though.
Ideally, start the remortgage process at least three to six months before you plan to make the switch. This should allow enough time to do your research and get the application paperwork finalised. Before you apply, check how long the new offer will be valid.
» MORE: Are you ready to remortgage?
When shouldn’t you remortgage?
The process of remortgaging can cost money and if the costs are greater than the benefits, you may want to sit tight for the time being.
If you remortgage before the tie-in period of your current deal ends, you may face an early repayment charge (ERC), along with an exit fee. An ERC could cancel out the potential savings of remortgaging to a cheaper deal.
Check how long your tie-in period lasts and take into account any penalties you will have to pay when you do your remortgage calculations. To avoid the charge, make sure the new deal starts at the exact point your current tie-in period finishes. Initial rates tend to last between two and five years.
Also consider any charges you’ll need to pay for setting up the new deal. This may include arrangement and admin fees, as well as a valuation fee and legal fees if you’re moving to a new lender.
If you’re happy with your current deal or have just recently committed to an agreement with your lender, remortgaging may not be worthwhile just yet.
When there is only a small loan left to pay off, once you deduct any substantial switching fees, savings made from switching interest rates may be negligible or none.
If your house has fallen in value since you bought it, you may find it more difficult to remortgage or access the most attractive rates. And if your financial situation, such as your credit score or salary, isn’t as healthy as when you took out your current deal, you may want to improve your situation before going through lenders’ affordability checks.
» MORE: How to improve your credit score
Can you remortgage early?
It’s up to you when you remortgage, but if you do it before your current deal ends and you’re liable for an ERC, it will have an impact on any savings you will make with a lower interest rate.
If an ERC is chargeable, you may have to pay between 1% and 5% of your outstanding mortgage loan amount. For a £110,000 mortgage loan, a 5% ERC would mean you pay £5,500, and even a 1% penalty would cost you £1,100. Though much less common, you may come across mortgages where the ERC is a fixed fee, instead of a percentage value.
Your lender should specify in your mortgage documents whether an ERC applies to your deal and exactly how much that works out as. You may also be asked to refund any discounts or other incentives that came with your mortgage deal, such as cashback.
If you are paying an ERC, it can usually be added to your mortgage loan with your new provider or you can pay it up front. If it is added to your mortgage, bear in mind that you will pay interest on a larger amount.
Not all mortgages have ERCs, though, and after your lender’s tie-in period, an ERC won’t apply.
If you’re staying with your lender, you may be able to switch to another deal with them in the last few months of your current deal without any penalty or fees.
Is remortgaging worth it?
If you would still be in pocket after deducting early repayment and set-up fees, then remortgaging a property could end up saving you money over time.
But if remortgaging will cost you more than staying with your current deal, it might not be the best time to switch. It makes sense to thoroughly review the market before committing to a long-term contract that will have significant financial implications.
Getting help from a qualified mortgage adviser can help you understand the full impact of remortgaging.
» COMPARE: Remortgage rates and deals
John Ellmore is a director of NerdWallet UK and is a company spokesperson for consumer finance issues. John is committed to providing clear, accurate and transparent financial information. Read more
Holly champions clear, jargon-free writing. She’s been creating finance content for leading organisations for over 10 years. Read more