Remortgaging – what it means, pros and cons and how it works

Are you getting the most out of your mortgage?

A recent Financial Conduct Authority (FCA) study found that many mortgage customers stay on higher interest rates and pay avoidable higher monthly repayments. Some borrowers even think they’re unable to switch and remain on higher interest product for years. So is it time to remortgage?

What does remortgage mean and how does it work?

In a nutshell, remortgaging means paying off one mortgage using a new one, and there are many reasons you might consider doing this.

Should I remortgage?

Whether you should remortgage very much depends on your situation.

Reasons to remortgage:

Your current mortgage product is coming to an end:

  1. If you do nothing, your payments will probably increase significantly. Be sure to start planning 5 months before your current product ends. Otherwise, you may end up paying the more expensive ‘standard variable rate’ or ‘SVR’ for a period of time. A good broker will help you work out the savings to be made by switching lenders and can help you compare this against staying with your current lender and switching products. It’s worth remembering that ‘whole of market’ brokers (ahem…) have almost 12,000 mortgage products available, compared to around just 2,000 that lenders offer directly to borrowers.
  2. Lower your monthly repayments. You may be able to pay lower interest rates with a new product. Be aware that if you’re on a fixed product at the moment, there will probably be an early repayment fee and an exit fee. However, it’s always worth looking into it because sometimes the savings outweigh the fees.
  3. Fix your rates for a specific period. You may be planning a family, have fluctuating income or just want to know exactly what your payments will be for the next two, three or five years, without worrying about interest rates going up. If you need longer, there are some longer term products of around seven and ten years, but always consider the early repayment charges, should you need to review and change your mortgage within that time.
  4. You’re looking to borrow more. Remortgaging to borrow more for home improvements or debt consolidation (such as credit cards, car loan, etc.) could work well for you, if your circumstances allow for it. Your current lender might be able to accommodate you, but if they say no, there’s nothing stopping you from looking at others.
  5. To switch from an ‘interest-only’ to a ‘repayment’ mortgage, or vice-versa. With an ‘interest only mortgage’, you still owe the original amount borrowed at the end of the term, when the lender expects the money back. If the plan you had for repaying the mortgage isn’t working out, you might want to switch to a repayment mortgage, giving you the certainty it will be repaid at the end of the term. It might be the other way around, and your circumstances and plans for the future mean you want to switch to an interest-only mortgage. Not every lender offers this concession, so you’ll probably need to change lender to get it, if it’s a viable option.
  6. You’re looking for flexibility. Some lenders offer more flexibility with their products than others. Some offer ‘payment holidays’ or ‘underpayments’ for a limited time, so if you’re planning a sabbatical or you’re taking some time off between jobs, this could be an option for you. You might want to consider an offset facility, so you can reduce the amount of interest being paid with your savings, but still have easy access to your cash.

It’s probably needless to say that it’s best to get a good mortgage broker to look into the different options for you. There are so many reasons to remortgage; every situation is different and every lender has different criteria so, often, it’s more complicated to solve than it first appears.

A good and independent broker will review your situation and analyse everything that’s available on the market to find you the best solution on the most competitive terms. Do get in touch if you’re unsure where to start. We’d be more than happy to have an initial chat and give you some guidance.

When not to remortgage

Here are some reasons why it’s not a good idea to remortgage:

  1. Your deal is very good. If you’re on a really good product and have no desperate need to remortgage, you might want to stick with it for now. Ask your broker to compare your current product with current deals available. You might think you have a good deal, but perhaps you could save ££££s by switching. An annual review might be a good idea for someone in this situation.
  2. Your current mortgage is really small. If your mortgage is below around £50,000 you might not save enough to justify the time and cost of switching. Some lenders don’t even consider mortgage values of less than £25,000. However, if you’re currently paying the standard variable rate, or if you’re borrowing more, there’s no harm in asking your mortgage broker to give you an idea of any savings to be made.
  3. You have a large early repayment charge. This might stop you from wanting to switch but whether you can save money depends on your individual situation. A good broker might be able to switch your mortgage and save you money, even after the early repayment fees.
  4. Your property value has dropped. If you find yourself in negative equity (where your loan is higher than the value of your property), consider whether you can reduce the balance to avoid being stranded on a standard variable rate. If not, this is an unfortunate scenario if you’re looking to make changes. Speak to your mortgage broker immediately to see if you can do anything to improve the situation.

How does a remortgage work?

Applying for a remortgage is usually straightforward. Here’s the process:

  • Get in touch with your mortgage broker 5 months before your existing deal ends. This might seem premature, but this gives you and your adviser enough time to establish your options, consider your preferences and priorities and make sure the next mortgage product is the best fit for your plans.
  • Your mortgage broker will request an agreement in principle from the lender and submit the application on your behalf.
  • The lender reviews the application, assesses your documentation and instructs the valuation. Many lenders are increasingly reliant on automated or remote valuations, which can mean no physical valuation is required – this can really speed up the process.
  • Once all the lender’s checks are complete, they’ll issue you with a letter with your mortgage offer.
  • If ‘free legals’ are included with the mortgage product (as most are), the lender appoints a conveyancing firm to carry out the necessary checks, request a redemption statement from your existing lender and set a date for completion.
  • Your new lender writes to you confirming you’ve completed and when your first payment will be taken.

How much does it cost to remortgage?

Most lenders will cover the cost of a basic valuation and legal work when you remortgage, to encourage borrowers to switch, although in some cases you can take cash back as a contribution towards appointing your own conveyancer, and this often works out better.

Our fee for a remortgage is dependent on your current situation and is paid on application for the mortgage – we’ll always tell before you apply how much you’ll save by switching. Similarly, we’ll help understand if you’re better off staying with your existing lender.

I hope this has been useful. Do get in touch if you have any questions or are unsure where to start. We’re here to help.

Your home may be repossessed if you do not keep up repayments on your mortgage.

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Categorised in: Information and advice

This post was written by Steve Moses