Remortgaging explained

24th October 2018

 

In a nutshell, remortgaging is where you take out a new mortgage on a property you already own. Typically this will be done to replace your current mortgage with another one (hopefully saving you money) or to borrow money against the property to help with home improvements or with a deposit for another property.

 

Why think about remortgaging?

 

We live in a comparison culture. It’s easy to check if you can get a better price on the TV you want to buy, your car insurance, or that new laptop. Yet with a mortgage, the biggest financial outgoing for most of us, we don’t consider the saving we could make by shopping around for a better deal.

 

You could save money

 

When it comes to mortgages, the ‘better deal’ we are talking about is related to both your interest rate and your loan-to-value.

It’s likely that when you initially took out your mortgage you were on a fixed or tracker interest rate for a handful of years (2-5 usually). When this period has come to an end, you’ll be automatically put on to your lenders ‘standard variable rate’ (SVR). This is often higher than your current interest rate and, more often than not, higher than the best remortgage deals around, which means you’ll be paying more. Finding a new mortgage, with a low-interest rate (or at least the same as your current deal) will save you money long term. Make sure you compare this saving against the exit fee though – this is a charge some lenders have for when you want to exit the contract.

The best case scenario in which you could save money by remortgaging is when your house has increased in value since you first took out your mortgage. If this is the case, you’re probably in a lower loan-to-value band which means you could be eligible for lower interest rates. Speak to a mortgage adviser who can establish if you can make savings if this is the situation.

 

You want to pay more than your lender will let you

 

Our circumstances change all the time and, when they do, your mortgage repayment plan might not be suitable for you anymore. Typically, this would be if you have had a big pay rise or if you have inherited a good amount of money.

In this case, it would be financially smart of you to pay off more of your mortgage than you originally planned to. Some lenders, however, will outright not let you or only let you make a small overpayment. This is typically 10% of the mortgage balance per year whilst you are in either a fixed or tracker rate deal.

If you remortgage though, you’ll be able to reduce the loan size and probably get a cheaper interest rate while you’re at it.

 

You want to borrow more

 

Most lenders will lend you extra money on your mortgage but it might be that the terms they offer are not very good. Remortgaging to a different lender, in this case, might enable you to get additional borrowing at a lower rate. Most people will do this in order to make home improvements or to pay off other debts. Bear in mind, if this is what you are thinking, that your lender will ask for evidence of where the additional funds are going to be used. They, as an example, would be unlikely to lend you additional money if you were starting a business or looking at business investment.

 

As with all financial products and services, it’s important to make any decision on the basis of sound advice and consideration. Do ask your mortgage adviser to explain if remortgaging is the best option for you and, if so, which lender can offer you the best deal.

 

All content is accurate at the time of publication

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