What is a remortgage?
A remortgage is the process of moving your current mortgage from one lender to another or from one product to another with the same lender. Most people who currently have a mortgage will be on a fixed or discounted interest rate for a period of time, typically between two and five years. When this period ends their current lender will automatically move their mortgage onto the lender's Standard Variable Rate (SVR) which is likely to be a higher rate than they are currently paying.
Advantages of a remortgaging
Reduce your monthly mortgage payments
If you remortgage on to a lower fixed or variable rate mortgage this will reduce your monthly mortgage payments. You could also consider reducing your current mortgage term and pay off your mortgage quicker.
Get better control over your finances
You can control your finances better by moving your mortgage onto a fixed rate and know your mortgage payments will remain the same for a few years. A typical two year fixed rate mortgage will give you peace of mind over the medium term without having to worry about fluctuating monthly mortgage payments.
Borrow more money
If you are looking to carry out some home improvements or have any other large expenditure on the horizon then remortgaging can release the funds needed as well as lowering the mortgage rate you are being charged. You will need to check first whether the cost of remortgaging is worthwhile as you may be able to obtain a further advance on your current mortgage deal that could work out cheaper overall.
If you have managed to get into debt with a credit card or other short term loan and you are struggling to manage the repayments then you could pay off this debt by remortgaging your property to release some funds. Remortgaging to pay off debt should be only be considered in an emergency as the total interest you will pay over the remaining term of your mortgage will be greater than the total payable on the short term debt. Also, you will have to divulge to your lender the reason why you are remortgaging which may affect you being granted a mortgage.
Lower the LTV on your mortgage
The ratio of your mortgage amount to your property value (known as the Loan to Value or LTV) may influence the interest rate charged together with other terms connected to your mortgage, such as deposit and fees. If your LTV has reduced over time, as your property has increased in value, then you may qualify for a more preferential mortgage rate and conditions.
Disadvantages of remortgaging
If you decide to remortgage with a new lender then you will be treated as a new applicant and have to go through all the checks and paperwork this requires. If you have become self-employed or started a new business since you commenced your original mortgage then you will have to provide two years' accounts or other evidence to prove your income. Your current expenditure will also be analysed so all loans, credit cards, or unnecessary spending will become apparent through the checking process.
If you borrow more money for home improvements then any increased payments may cause financial stress so you might have to cut back on other expenses to balance the books. As mentioned earlier if you borrow more money to consolidate existing debt then the interest you pay over the term of your mortgage will be greater than the total interest paid on the short term debt.
If you remain with your current lender then you may only be charged a redemption penalty to end your current deal but in some circumstances, this may be waived.
If you move to a different lender then there will be costs involved in your remortgage such as a property valuation, arrangement fee and legal fees. It is important to make sure that the costs involved don't outweigh any savings you make on your monthly mortgage costs.
When looking at the costs of remortgaging you should look at the total cost over the fixed term you have selected not just the headline interest rate as shown in the examples below.
Remortgage cost comparison examples
The table below compares 2 year fixed remortgage rates from different lenders with a remortgage of £200,000 on a property valued at 280,000.
|2 year fixed rate||Lender A||Lender B|
|Initial interest rate||1.19%||1.52%|
|Saving over 2 years||N/A||£1,263|
As you can see from the above table the remortgage available from Lender A has a lower headline interest rate of 1.14% and appears on the surface to be the better deal. However, further investigation shows that the fees charged by Lender A are much higher than those charged by Lender B and result in the total repayment cost over the 2 year fixed rate period being £1,263 higher with Lender A compared to Lender B.
The table below compares 3 year fixed remortgage rates from different lenders with a remortgage of £200,000 on a property valued at 280,000
|3 year fixed rate||Lender A||Lender B|
|Initial interest rate||2.25%||2.49%|
|Saving over 3 years||£356|
As you can see from the above table the remortgage available from Lender A has a lower headline interest rate of 2.25% and appears on the surface to be the better deal. However, further investigation shows that the fees charged by Lender A are much higher than those charged by Lender B and result in the total repayment cost over the 3 year fixed rate period being £356 higher with Lender A compared to Lender B.
* The figures for the above examples have been provided by Habito, an online mortgage broker that doesn't charge any brokerage fees and the remortgage deals were available at the time of writing this article.
Should I remortgage?
How to find the best mortgage
Arranging the best mortgage for your circumstances is one of the cornerstones of a sound financial plan. The mortgage market is so competitive with lenders trying to price their products to attract new customers so it makes sense to take advantage of this by reviewing your mortgage on a regular basis. It may also be worth using a remortgage to release funds for home improvements that will add to the value of your property.
We have created a very useful Mortgage Best Buy Table in partnership with Habito where you can enter your personal mortgage details and compare available products and apply for a remortgage with the click of a button.
Things to consider before remortgaging
You should answer the following questions before remortgaging:
- will I have to pay a redemption fee to my existing lender to remortgage?
- do I want to borrow more money and if so how much?
- are my finances in order with no current debt problems or CCJs?
- can I prove my income with bank statements or 2 years accounts?
- have I carried out some research to find out the best remortgage for my circumstances?
- have I calculated the costs involved and how much I will save
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