Remortgaging – What is it and just as importantly should you do it?
To remortgage is when you take out a new mortgage on a property that you already own, be it your residential property or a buy to let investment property. Approximately one third of all mortgages in the UK each year are remortgages.
A remortgage needs careful thought, and often specialist help because of the work involved. We live in an age where money saving, and bargain hunting is the thing to do. You will see countless adverts about switching your utilities or your mobile phone contract to save money, but you do not see much mention of cost saving when it comes to your mortgage. We cannot claim to know the reasons why this is the case, but as your biggest financial commitment, shopping around for a new mortgage deal can save you, quite literally, up to £1,000s each year.
As with anything, there are advantages and disadvantages to remortgaging, so we suggest that you seek professional help to decide if its for you.
The main reason that people want to remortgage is to save money, but its not the only reason, so let’s explore the reasons why you may want to do it:
Your current deal is coming to an end.
‘Special’ mortgage rate deals only last for a set period of time, generally between two and five years. When it does come to an end, your mortgage will automatically revert to your lenders standard variable rate (SVR). This is likely to be higher than the rate you were on, and the current ‘best buys. As such you should consider a remortgage.
When it comes to an end, your lender will put you on its standard variable rate (SVR). It’s likely to be higher than your old interest rate and higher than the best buys available. In order to avoid this potential increase in rate and payments you should start considering your options 3 – 4 months before your current product is due to end.
Your rate is high, and you want a lower one!
You could well be still tied into your current mortgage deal, and to come out of it early is likely to result in the payment of an early repayment charge. This varies from lender to lender, and product to product, but could be in the range of 2 – 5% of your mortgage balance. Depending on the size of your mortgage this could mean a large sum of money.
However, depending on your current rate, and the new rates available, the savings may outweigh the costs, and so you shouldn’t disregard this. Just make sure that you (or your broker) do the maths first.
You’re worried interest rates may go up.
We need to establish what is meant by interest rates going up before panicking. If you have already got a fixed rate mortgage, well this will not affect you so stop worrying! If, however you have a variable rate mortgage, and you have heard that the Bank of England may increase rates then yes, you may be affected.
Your home has increased in value.
If your property has increased in value by a few thousand pounds, then this might not be for you, but if it has gone up in value significantly then it may be worth considering. You may not have reviewed your mortgage for many years, or you may have carried out some substantial home improvements that have had a dramatic effect on your homes value. If this is the case, you may find that you suddenly fall into a lower loan-to-value bracket and therefore may be able to obtain a much lower interest rate. Again, do your maths, and if it makes financial sense, proceed!
You want to make an overpayment.
For whatever reason you find yourself in a position where you have some extra money available, and you want to use it to reduce your mortgage balance. Thankfully, most mortgages allow you to make lump sum repayments up to a certain value, but a few don’t. Remortgaging to another lender for a lower interest rate could prove beneficial to you but beware of early redemption charges.
You want to borrow more money.
The most common reasons to borrow additional money are for home improvements or debt consolidation. Whatever your reasons, we would always suggest (especially if you are tied into a ‘special’ rate) you speak to your current lender first. That said they may not offer you very attractive terms, or even worse no money at all.
It may therefore be beneficial to arrange a remortgage to a new lender who is willing to offer you the money and at greatly reduced interest rates. Be careful though, the lender is perfectly within its rights to ask for builder’s quotes etc, or even evidence that you have redeemed your debts.
Just as we have mentioned the most commons reasons to raise funds, there are reasons that lenders wont (in many cases) allow, such as starting a new business.
You want a more flexible mortgage.
You may have had your mortgage for many years, or you may not have realised that flexible mortgages were available. Whatever the reason, you find that you are not happy with your current mortgage because you cannot make overpayments, or you cannot take a payment holiday. You find that you now need some flexibility as you want to go travelling for a few months, or you may want to change jobs and need some financial ‘wiggle’ room.
Whatever it is you are looking for, there is a very good chance that there is a mortgage out there that will meet your needs. However, flexibility often comes at a price, so be prepared to accept a slightly higher interest rate or have higher arrangement fees to pay.
You want to switch from interest-only to repayment mortgage.
If you have an interest only mortgage and have now decided that you want to change it to repayment, the first port of call should be your current lender. They will be very accommodating and could offer you a variety of solutions, so always speak with them first.
So, we’ve discussed the many reasons why you might want to remortgage, but there are also several reasons why you should not remortgage, and we explore those below:
You already have a great rate.
Don’t get complacent though! For the time being you may have a great rate, but it may not always be that way. It pays to always keep your eyes on the market and if your broker is anything like us, they should be in touch with you every 6 months or so anyway, just to keep you up to speed with general market conditions.
Large Early repayment charge
As mentioned earlier, early redemption charges vary, and in some cases can be higher than the benefit of switching to a lower rate, especially if you are not long into your current rate. Paying a large penalty would be silly, so do not bother, just make sure that you are ready for the moment that your current rate ends, or for the point at which your penalty is no longer a deterrent.
Your mortgage balance is small.
There will be a point at which it makes no financial sense to bother switching to a lower rate as the costs that you will incur to do so will far outweigh the benefits. Even though your rate is higher and the new rate on offer is much lower, do not be tempted. Assess all the costs to give you a true indication of the costs vs benefits before making your final decision.
There are some lenders/ options that will charge little or no fees at all, and they may even pay for some of the costs. If that’s the case then the switch may be worth it, but as we said above, do the maths!
Your circumstances have changed.
Its surprising what can happen in the period between 2 – 5 years since last arranging your mortgage. You may find that your circumstances have changed. For example, you my have stopped working, or become self employed. Who knows, there may have been a pandemic, and you could find that you’re on furlough. If so, your financial position may have changed, and you may find that you no longer meet a lenders affordability criteria. Lenders also now need to see evidence of your income in 99% of cases, so if you are unable to produce the right documentation, you may again find a mortgage unavailable.
You’ve suffered some credit problems.
Following on from the above, you may have found that your change in circumstances had led to some credit problems. Since the financial crisis dating back to 2007, lenders have become much pickier about who the choose to lend to. It is now a requirement 9by the FCA) that checks must be carried out to ensure your mortgage is not inly affordable at todays rates, but also at rates in the future to, assuming they rise.
The result is that all lenders now want much more information relating to your income and expenditure. They expect to see spotless payment records and at least a good handling of any outstanding debts. All it takes to affect this is to miss one payment on a credit commitment.
We have mentioned credit files in another article so go have a look and register to get a copy of your credit report for free.
Your home has decreased in value.
When you bought your home, you may have had a 5 or 10% deposit and got yourself a mortgage on the remainder, but now you find that your home has lost some value and you are now suffering from negative equity. This means the amount you owe is more than what your home is worth.
If you are unlucky enough to fund yourself in this position, you have little option but to hold on, and wait for things to turn around. Hopefully, your property will eventually increase in vale, reversing the negative equity.
You have very little equity.
They are starting to return to the market again now, but very slowly. I’m talking about mortgages where you only have a 5% deposit. There are very few lenders, at the time of writing, offering these mortgages, so you may find it very difficult to even get a mortgage if you are in this category, let alone remortgage. Your only option may be to speak with your current lender and see if they are able to offer you a better rate.