In this article we explore the times it is a good idea to remortgage your home, whether it is to secure a better deal, to release equity or because your circumstances have changed. We also look at the cost of remortgaging and the times it might be best to stick with your current mortgage deal.
What is remortgaging
Remortgaging is the process of moving your current mortgage on a property to a new lender or on to a different mortgage deal with your current lender.
Most mortgages are arranged on a fixed-rate basis which means that your mortgage payments are fixed for a typical period of 2, 3 or 5 years. When this fixed-rate period ends the mortgage will be moved on to the current lender's standard variable rate (SVR) which will generally be higher than your current fixed interest rate. Fixed-rate deals are popular with lenders as they lock you in for a period of time and very competitive rates are offered to lure you away from your current lender at the end of your fixed term.
Reasons to remortgage
1. To get a better mortgage rate
The current mortgage market is very competitive with interest rates on offer that could help you reduce your monthly mortgage payments quite significantly. If you are thinking of remortgaging then you should check out our Mortgage Best Buy Table in partnership with Habito* the online mortgage broker.
Simply enter the details of your mortgage requirements in order to obtain the best mortgage deals available ranked by monthly repayment, lender fees or total cost. You can also compare any mortgage deals offered by your current lender to see if they are competitive, together with any fees involved.
When remortgaging you can either remortgage with a different lender or remain with your current lender if you can obtain a competitive deal. If you remain with your current lender the remortgage costs will be less as there will be no need for a survey or legal work as you will simply transfer on to a different mortgage deal.
2. Home improvements
If you are looking to carry out some major home improvements then you could borrow more money to pay for these by remortgaging.
You have three options when raising finance for home improvements:
- Borrow more money by way of a further advance - if you are happy with your current lender or you are in the middle of a fixed-rate term then borrowing more money (by way of a further advance) could be the best way to raise finance. Your current lender will still have to ensure that your current income will cover the additional mortgage payments and carry out a credit check.
- Remortgage with your lender - if you are getting near the end of your fixed-rate period you could remortgage with your current lender if its interest rates are competitive. Remortgaging with your current lender will cost less than remortgaging with another lender. Even if you are not near the end of your fixed-rate term it would be worth approaching your current lender as they may be prepared to waive any fees as they will be transferring you on to a new fixed-rate deal and tie you in for a further few years
- Remortgage with another lender - this would provide the opportunity to search the whole mortgage market to find the best mortgage deal for your circumstances. The costs involved with moving your mortgage to a new lender will be higher so you will need to calculate whether the money you save by moving on to a better rate outweighs the costs involved.
3. More flexible mortgage terms
You may be in a position to make overpayments on your mortgage or your income may be variable, so flexibility or payment holidays may help with your budgeting. Moving to a lender that offers more flexibility would be an ideal scenario with your new mortgage being more suitable for your lifestyle.
4. Debt consolidation
If you have short-term loans or credit-card debt across a number of providers, you could raise money by remortgaging, which would allow you to pay off these debts leaving you with one single lower monthly payment.
There are however a few issues when it comes to remortgaging to consolidate debt:
- You will have to declare your current debts to the lender who may not see you as a good risk if there are signs of financial mismanagement on your part
- You will be paying off this debt over a longer period and therefore be paying more interest in the long run
- Once you have cleared your short-term loans or credit-card debt there may be a temptation to use this route again and result in further short-term debt.
5. Change in circumstances
Your current mortgage was agreed using the information you provided at the time and this may have restricted the range of mortgage options available. If your income has increased or you have paid off some short-term debt then you may qualify for a mortgage with a lower interest rate or more flexible and advantageous terms. In this situation, it is worth checking your credit score with the major credit reference agencies: Experian, Equifax and TransUnion. You can check your score for free with ClearScore* and MSM Credit Monitor*.
6. Reduce the mortgage term
If you remortgage on to a lower interest rate, it would make financial sense to shorten the term of your mortgage, which would serve to reduce the amount of interest you will pay over the lifetime of the loan. If you can afford to do so, increasing your mortgage payment by even a small amount each month can shave off years and thousands of pounds worth of interest.
The monthly repayments on a £160,000 fixed-rate mortgage over 25 years with a 1.45% interest rate would be £636 in the 2 year period
The monthly repayments on a £160,000 fixed-rate mortgage over 20 years with a 1.45% interest rate would be £768 in the 2-year period
After the 2-year period has finished, you will review your mortgage options again and maybe you could afford to reduce your mortgage term even further. I believe this is one of the best strategies for paying off your mortgage early; you can reduce your mortgage term gradually by increasing your monthly mortgage payments as your income increases over time.
7. Equity release
If you are planning to start a business or maybe want to buy a second property, remortgaging to release some equity tied up in your current property is one way of raising finance. Equity is the difference between the current value of your property and your outstanding mortgage and the greater this is, the better it is when it comes to releasing equity.
If you are nearing the end of your fixed-term mortgage deal then this could be a good time to consider equity release as you could remortgage to a competitive rate and at the same time release the equity you require.
One thing to remember when releasing equity in this way is that you will be repaying the amount over the remainder of your mortgage term, so think carefully about how you are going to use the money. If, for instance, you are looking to start a business with this money you need to contemplate what happens if your business venture is unsuccessful and you are left with an increased mortgage to repay.
How much does it cost to remortgage?
If you remortgage with your current lender, which is basically just a product switch, the costs will be low as you will only be paying an administration fee and an exit fee if you are leaving your current deal before the end of the fixed-rate term.
If you are remortgaging with a different lender then the costs involved will be higher as they will include some or all of the following:
- Mortgage advice fee - using a mortgage broker can save you money overall as they can give advice on the best remortgage deal for your circumstances, with the cost ranging from £150 to £1,000. I would recommend reading our independent review of Habito, a specialist online mortgage broker who does not charge a mortgage advice fee and has received almost 7,000 '5 star' reviews on Trustpilot.
- Valuation Fee - charged by the new lender to carry out a valuation on your existing property and costs range from £200 - £500 depending on the value of the property.
- Arrangement fee - a fee charged by the new lender to cover the cost of administering the mortgage and costs vary widely between lenders with the average fee around £1,000. In most cases this fee can be added to the loan but you need to be aware that interest will then be charged on that fee which can mount up over the term of the mortgage.
- Legal fees - This will include searches, transfer of ownership and all other legal paperwork together with the fee paid for transferring the mortgage money between lenders these costs will average around £1,500.
- Redemption fee - will be charged by your current lender if you leave your mortgage deal before the end of the term and the cost will depend on how much of the term remains.
All these costs need to be factored in when deciding whether to remortgage and what deal is best for you. Often deals that look particularly attractive in respect of the interest rate can carry the highest fees and may not look as attractive when you factor in the fees involved.
How much can I save by remortgaging?
How much you can save by remortgaging will depend on your current mortgage deal and how competitive the mortgage deal you are moving to is. In an attempt to provide some idea on the savings that are possible, I have set out below two remortgage examples:
Example 1 - Remortgaging to a 2-year fixed deal
Here I compare one of the cheapest remortgage deal, available at the time of writing this article, based on the cost over 2 years with a more expensive deal available. The term is 20 years as I have assumed that as this is a remortgage that you would have reduced your mortgage term from the typical 25 years.
|2 year fixed rate||Lender A||Lender B|
|Initial interest rate||1.82%||2.50%|
|Saving over 2 years||£2,242|
Example 2 - Remortgaging to a 3-year fixed deal
Here I compare the one of the cheapest remortgage deal, available at the time of writing this article, based on cost over 3 years with a more expensive deal available. Both terms are for 20 years as I have assumed that as this is a remortgage that you would have reduced your mortgage term from the typical 25 years.
|3 year fixed rate||Lender A||Lender B|
|Initial interest rate||1.89%%||2.49%|
|Saving over 3 years||£4,805|
These examples show how much you can save by remortgaging from an inferior deal to the best available. These deals were available at the time of writing this article with all figures supplied by Habito*. The current best deals can be found in our Mortgage Best Buy Table
When not to remortgage
Any of the circumstance listed below may suggest that now is not the time to remortgage. If none of these apply to you or you can get the issues resolved then a remortgage may still be a feasible option:
- You are in the middle of your current fixed-rate term and you will incur a sizeable redemption penalty
- You have a poor credit history, particularly if this has deteriorated since setting up your current mortgage
- The total fees for the remortgage are more than the savings made during the fixed-rate term of the new mortgage
- Your financial situation has changed either with a reduction in income, becoming self-employed or you have started your own business
- You have divorced or separated from a partner whose income was used when arranging your current mortgage
If a link has an * beside it this means that it is an affiliated link. If you go via the link Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. But as you can clearly see this has in no way influenced this independent and balanced review of the product. The following link can be used if you do not wish to help Money to the Masses - Habito, ClearScore, MSM Credit Monitor