A mortgage is most likely your largest monthly expense. Making sure you are on the most suitable rate can ensure you are not paying over the odds. A remortgage helps you move to a more competitive deal and can even help release cash tied up in your home. Here is how a remortgage works and the best way to do it.
What is remortgaging?
Remortgaging is the process of switching to a different mortgage product. This could be from the same or different lender but borrowers will usually remortgage when they come to the end of a deal or to release cash tied up in the equity of their property. Find out more in our guide 'How to remortgage in 5 simple steps'
Reasons why you may want to remortgage
The main reason for remortgaging is to avoid falling onto a lender’s Standard Variable Rate (SVR). This is the default rate a mortgage moves to once a deal period ends. For example, if you had a two-year fixed rate on a 25-year £150,000 mortgage at 1.5%, you would pay £599 per month. But once that two year period ends, your mortgage could move onto the typical SVR of 3.19% and the repayments would increase to £726. You can save money by remortgaging to a different and hopefully cheaper deal although sometimes it may be worth paying more such as if you are moving from a tracker to a fixed rate.
Another reason to remortgage is to release equity from your home. This could give you tax-free cash that you can use to fund home improvements or even a deposit for another property. You could do this at the same time as remortgaging onto a different rate by taking a larger loan than what is owed and using the excess as cash. For example, if you have a mortgage worth £150,000, you would need to remortgage with a new product for the same amount but if you took a £170,000 mortgage instead you would then have £20,000 of cash when it completes. This would increase the monthly repayments though as you will still be borrowing a larger loan.
How does remortgaging work?
A remortgage replaces your current mortgage with a new one. It isn’t always as easy as simply switching to a better deal though. You still have to go through a new mortgage application and the system has got tougher since the Mortgage Market Review in 2014. A lender will now assess your income and you also will need to meet its strict affordability criteria and pass its stress tests. This could be trickier if your current mortgage was from before 2014 and your situation has changed, especially if you became self-employed or have more expenses. The new remortgage will either be the same value as your current home loan or more if you want to release extra cash.
The new lender will want to value your property to ensure they agree that it can meet their loan-to-value criteria. If you pass the application and your property value is agreed, the new mortgage will be used to pay off your old mortgage and you then move onto the new repayments. If you are taking cash out of the property then this will get sent to a nominated account at completion. If you are remortgaging with the same lender you will not need any legal advice or conveyancing as it is treated as a product transfer and your provider would already have the information it needs such as the product and property details. You will need to go through conveyancing if you are remortgaging to a new lender as there will be extra ID checks and the solicitor will ensure the loan matches the value of the property and register changes with the Land Registry.
What to do before you remortgage
There is quite a bit of paperwork involved in getting ready to remortgage. You need to know how much is left to pay and how many years are left on your current home loan. This information can be found on your latest mortgage statement which should be sent by your current lender. It is important to know when your current deal ends as it can take a couple of months to get a new home loan approved and you want to time it so you can move to a new deal before falling onto a pricey SVR.
Your current lender will most probably send you details of new deals you can remortgage to but it is worth shopping around so you can compare a range. You could use a comparison website or alternatively a mortgage broker can help recommend the most suitable deal based on your income and property value and they may know which lenders are most likely to accept someone with your borrower profile.
Check your property value using websites such as Rightmove or Zoopla or a local agent so you will have an idea of whether you can meet a lender’s loan-to-value requirements. This may be an issue if your property value has fallen and is worth less than the current mortgage, which would put you in negative equity. It may then be harder to remortgage or you may be asked to provide extra cash to make up the shortfall.
Once you know the value of your property, check how much you are able to borrow. Some lenders have mortgage calculators on their website that can work this out or a mortgage broker could help. A lender will want to see at least three months of payslips and your banks statements as well as details of regular expenditure and debts so it is a good idea to have this prepared before starting your application.
How much does remortgaging cost?
There are a range of fees associated with a remortgage. There could be an early repayment charge (ERC) for leaving your current provider before the end of a deal. These charges are usually a percentage based on the number of years left. Not all lenders charge an ERC. Your lender may charge a fee. These often have different names such as product or arrangement fee and can range from as low as £99 to almost £2,000. Don’t be automatically deterred by a high fee as often they come with a lower rate so it is worth comparing with a mortgage that may have a lower initial fee but higher monthly costs.
Habito, an online mortgage specialist has produced a mortgage calculator that allows you to sort the results by the 'true cost', meaning you can easily see the rates and fees associated with the remortgage. Additional costs may include legal and valuation work, although some lenders will cover this. Habito does not charge a broker fee as it earns a procurement fee from the lender, however, some mortgage broker's do charge a fee and so it is worth double-checking before you start the remortgage process.
When is the right time to remortgage?
The best time to switch provider is when you are coming towards the end of a deal. This ensures that you avoid falling onto an SVR. You may also want to remortgage to release equity in your property. Don’t worry about always waiting until the end of a deal period though. It may be worth remortgaging if there is a much cheaper rate around that drastically reduces your monthly repayments. Sometimes this could work out cheaper even after paying the ERCs and some lenders won’t have exit fees.
Another reason to remortgage is to switch the type of product you are on. You may want to move from a tracker to the certainty of a fixed rate deal so you know what your repayments will be over the long-term.
The remortgaging process
It can take up to two months to get a remortgage granted. This could be longer depending on how long it takes to gather the information needed and find the right deal. It also depends on the route you take.
Remortgaging with the same lender
Remortgaging with the same lender is the faster option. It is treated as a product transfer rather than a whole new application. A lender will already have all of your information so there is no need for a long and detailed application process. All you have to do is choose one of the new rates that a lender is offering and sign some new documents.
Remortgaging with a different lender
It gets a bit more time consuming if you are applying with a different lender but it may be worth it as you can shop around for cheaper rates. You will need to start a new application either yourself or through a mortgage broker. Once you have found the deal you want to move to you will need to prepare your application. A lender will want to know your income and expenditure as well as any future spending plans. Rather than wasting your time and risking your credit score with failed applications, most lenders will let you get an agreement in principle to see if you would be eligible for its rates. This is a basic check based on your income and requirements that you can do on a lender’s website or through a mortgage broker. There is no initial credit check but there is no guarantee you will be accepted.
Once you have obtained an agreement in principle you can make a full application. A lender will conduct a thorough check of your finances and credit report. You will need to do a mortgage interview and pass its affordability and interest rate stress tests to ensure you can afford the new loan. The lender will also want to value the property to ensure it meets its loan-to-value criteria. If accepted, there will then be some legal conveyancing work such as ID checks and Land Registry changes. This can take a couple of months but an offer can last three to six months, so it is worth starting early to lock-in the best rates. Once everything is signed off, your new lender will pay off your old mortgage debt and you will begin on the new monthly repayments with the new lender.
How to get the best remortgage deal
As with everything in personal finance, the key is to shop around. Your current lender will send you plenty of letters offering new rates when you are coming towards the end of your deal. There is no obligation to take these and it is worth shopping around for the best deal. Online comparison sites can give you a good idea however it may be worth using an online mortgage broker such as Habito as they can provide free advice and support. Check out our independent Habito review.
Consider the type of product such as whether you want to move to a fixed rate or tracker mortgage and if you want a two, five or even 10-year deal. A fixed rate gives you certainty as you know what your monthly repayments will be. A tracker usually follows the Bank of England base rate so your payments will be cheaper if it goes down but more expensive if it goes up.
Should you remortgage?
You should always consider remortgaging if you are about to move onto an SVR as in most cases you will save money on your monthly repayments. There may be times when it is harder to remortgage such as if your property value has fallen and you are in negative equity or if your employment situation has changed and it is harder to get approved for a mortgage. In these cases, it may be worth waiting a little longer if you can afford it or seeking mortgage advice. A remortgage is also a popular way to release equity from your property as cash. This will increase your monthly repayments though so also consider other options such as using a credit card, savings or a personal loan.
