Remortgaging: Do I actually need to do it?
Remortgaging can help save money on your mortgage and gives you some extra tax-free cash to spend as you wish.
Firstly, what does remortgaging mean?
Remortgaging is the process where you can transfer your current mortgage to a different product, either with your current provider or a new one altogether. For a more in-depth explanation on remortgaging take a look at our article: What is remortgaging and how do I do it?
In this article we look at remortgaging and whether it is the best option for you. We also look at how easy is it to remortgage and who to contact to get the best to remortgage deal?
Reasons to remortgage
The four main reasons for remortgaging are as follows:
- Consolidate debts
- Equity release
- Home improvements
- To get a better rate
We look at each type of remortgage in more detail below.
A remortgage can help pay off other debts such as a loan or credit card. If you have enough equity built up in your property, you could take a slightly larger mortgage to pay off the old mortgage and then use the excess cash to settle other bills.
You would end up with a larger mortgage but this should still work out cheaper than your credit card or other loan repayments as you will repay over a longer period. Mortgages tend to work out repayments over 25 to 30 years, while a loan or credit card could be over just a few years.
However, there are risks to this approach. If you are already struggling to repay debts this may have impacted your credit rating and score, so it may already be harder to get approval for a remortgage. Similarly, if you get a remortgage approved, will you end up with debt that you will struggle to manage?
By remortgaging to consolidate debt you are also shifting the liability as your home is put at risk of repossession if you can’t afford the repayments. In contrast, missing loan or credit card payments will only impact your credit rating.
Anyone can remortgage as long as there is enough equity in their property to pay off the old loan. But some lenders may have upper age limits on lending. This makes it harder for older borrowers to remortgage as lenders may worry about whether they have enough provable income to keep up with repayments and whether they will survive until the end of the mortgage term.
An alternative for older homeowners is equity release, often only available to those aged 55 and older. Equity release is designed to release the cash that is locked up in a property.
There are two types of equity release schemes, a lifetime mortgage, and a home reversion plan.
A lifetime mortgage is a specialist mortgage secured on your main residence. Unlike a remortgage, there are no monthly repayments and instead, the loan amount and accrued interest is rolled up and is repaid when you die or move into a care home.
Another option is a home reversion plan, which have older minimum ages of 60 or 65 and let you sell some or all of your home to a home reversion provider in return for a cash lump sum or income. You'll be able to continue to live in the property rent free but there is a catch, you'll will be required to sell your home or part of your home at a discounted rate of between 30% and 60% of the market value.
It can be easier for older homeowners to access equity release than a remortgage, but the fees can be higher and it raises inheritance issues especially if your dependents have to sell the property to repay the debt.
Some lenders are now offering over 55's retirement interest-only mortgages, for more information on this see our article, Nationwide first major lender to offer retirement interest-only mortgages.
Fancy a new kitchen or bathroom? You could release cash through a remortgage to fund your home improvements. This would mean increasing the value of your new mortgage to settle the old mortgage and having money left over.
Make sure you set a budget and get quotes for what you are planning to do before you start as you don’t want to borrow too little as it will be hard to make up the shortfall. Similarly, make sure you don't borrow too much as it means you are essentially paying interest on money you have not used and didn't need.
It is important to ensure you can afford the repayments as you are putting your home and your new kitchen, bathroom or extension at risk of repossession if you can’t afford to repay.
Alternatively, you could consider unsecured debt such as a personal loan or credit card. If the work planned is less than around £40,000, it may be worth looking at personal loans, particularly in the £10,000 bracket where rates are hovering at record lows of 3%. If you can afford the repayments, you could also consider credit cards that offer interest-free purchase periods, but don’t forget to repay the bill each month to avoid being charged the pricey APRs.
Get a better rate
The main reason homeowners remortgage is to get a better rate. A mortgage will typically move to a pricey standard variable rate (SVR) once a deal ends, causing a hike in your monthly repayments. For example, the monthly payments for a £150,000 mortgage on a two-year fixed rate of 1.68% over 25 years would be £613. At the end of the deal period it could move to a typical SVR of 4.99%, which would increase your monthly repayments to £868 a month. This is an increase of £3,000 over a year. You don’t have to accept the lenders standard variable rate and so can remortgage instead. Mortgage rates have hit record lows in recent years so rather than settling for the SVR, which will in most cases be higher than deals on offer to new borrowers, you could instead remortgage to a lower rate.
Should I remortgage?
The process of remortgaging should enable you to get onto a better mortgage deal and ultimately save you money. Remortgaging may not always mean paying a cheaper rate. For example, you could be on a tracker mortgage, where pricing is usually lower than fixed-rate deals, but you may wish to switch to a fixed-rate deal to avoid any interest rate rises. This could mean your monthly payments increase but you would at least know that they will remain the same for a defined period. Alternatively, you may wish to switch from an interest-only mortgage to a repayment mortgage, which will create a larger loan and higher monthly payments. You may also want to move to a more flexible deal that lets you overpay or move the mortgage to a new home.
Aside from finding a better deal, remortgaging is also a useful way to access the cash locked up in your property. You could use a remortgage to withdraw cash from the extra equity in your home if it has increased in value. This then gives you cash to spend on anything from clearing debts to home improvements. This can be cheaper than taking a personal loan or using a credit card - where the debt must typically be cleared over a short period of months or a few years - as your repayments are instead added to and repaid over the term of the mortgage
When shouldn’t I remortgage?
Remortgaging won’t work for everyone all the time. The best time to remortgage is when you come to the end of a deal as some lenders may charge exit fees, known as an early repayment charge (ERCs), to pay off and leave earlier. Some mortgages such as trackers or those already on SVRs may not have ERCs to pay. There are costs associated with remortgaging such as adviser and product fees so make sure you can afford these and that they don’t outweigh the benefits of switching.
You may find it harder to remortgage if your circumstances have changed since you last got a mortgage. Lenders have introduced tougher application rules and interest rate stress testing under the Mortgage Market Review which came into place in 2014. This can make it harder for those who are self-employed or have income that is hard to prove. Additionally, lenders can be fussy about anomalies on credit reports, so if you have a poor score or debt issues it may be harder to get approval as lenders will be unsure at how reliably you can keep up with repayments.
Check the value of your property before remortgaging. It can be hard to get a remortgage above 75% loan-to-value so if you only paid a small deposit initially or it has fallen into negative equity (meaning the value is worth less than the mortgage) it will be harder to get approval or you may need to make up for the shortfall. Instead, it may be worth waiting for the value to go back up or try to boost your property price. You can enter your postcode and find local prices on property websites such as Zoopla and Rightmove.
It is also harder to get a remortgage if you only have a small amount left on the loan due to most lenders having a minimum loan size, starting at around £50,000.
Things to consider before remortgaging
Cost - Can you afford to remortgage?
Moving to a better rate and getting cash out of your property sounds attractive, but it doesn’t necessarily come for free. There may be adviser or product fees to pay as well as ERCs if you are leaving early. If you are withdrawing cash you will be left with a bigger loan that could be more expensive or take longer to repay, leaving you with the debt for longer than you may have initially anticipated. All this should be factored into the overall cost.
Circumstances - Are your personal financial circumstances likely to change in the next 12 months
It can be hard to predict the future, but having an idea of your plans is important. For example, if you are taking on a larger mortgage, is there anything likely to happen in the next 12 months such as a job change or big expense such as a wedding that may make it harder to afford the repayments. Similarly, if you are planning to move it may be harder to take a new deal with you.
Remember your home is at risk of repossession if you can’t keep up with repayments so it is best to be honest rather than gambling the roof over your head.
Legal advice - Do you need a solicitor to remortgage?
A solicitor or conveyancer is important in a remortgage as they ensure the transaction is properly registered and verify your identity and that you own the property.
You have two options when remortgaging. You can either use your existing lender or a new one. If you use your current lender there will be no need for any legal work as much of this will have already been done. Instead, your remortgage is treated as a product transfer.
A solicitor is needed if you are moving to a new lender as they will need to verify who you are and the status of the property and register the mortgage charge at the Land Registry. Some mortgage lenders will provide legals for free, while others will charge. You don’t have to pay for a lender’s solicitor if there is a charge and can instead shop around for your own conveyancer.
Mortgage Advice - how to make sure you get the best remortgage deal
The first remortgage rates you are likely to see will be from your current lender. They will write to you as you near the end of your current deal. There is no requirement to stay with them. Remember, a bank adviser will only ever offer their own brand’s products. You could also use comparison websites to get an idea of the best rates, but this won’t show your chances of approval.
Alternatively, a mortgage broker can provide an overview of the wider mortgage market and make recommendations based on your requirements. They may have specialist knowledge of the most suitable lender for your needs and can also help you through the tough application process. Make sure that the broker you choose is independent and check whether they will charge a fee. Most mortgage brokers won't charge a fee and will instead receive a commission payment from the lender known as a procuration fee or proc fee for short. You could opt to complete the whole process online using an online specialist thanks to the recent arrival of firms such as Habito, Trussle and Mojo.
We were intrigued and so took the opportunity to scrutinise one of the biggest online specialists Habito by visiting them at their London offices. We were particularly interested in their recommendation process, how they search for suitable deals and whether they are true to their word when it comes to recommending other providers if they can't help. The whole process is incredibly smooth, the advisers are approachable, knowledgable and professional at all times and their ethics and recommendation process easily stood up to our scrutiny. Habito's customers seem to agree with them amassing 2,500 reviews on Trustpilot achieving an average of 9.4 out of 10. If you want to try the system for yourself, simply click on the above link and then click go to 'Get started'.
The remortgage market is attractive at the moment due to rates hovering around record lows. There really are no excuses for not shopping around if you are coming to the end of a deal or have been stuck on an SVR due to inertia. Additionally, a lack of property supply, high stamp duty charges and property prices means many homeowners are choosing to improve rather than move. Remortgaging helps homeowners withdraw cash from the equity in their property and take advantage of rising values.
The idea of saving money or being able to access cash is attractive, but remember it is still a big financial commitment and it is important to seek advice, if necessary, to ensure it is the best way to meet your goals both now and in the future. An independent specialist such as Habito will be able to look at all of your options and help you to work out the total cost and whether remortgaging is the best option.
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