How does remortgaging work?

20th September 2022 posted in Sellers Landlords

Remortgaging can be used as a way to reduce monthly mortgage payments or to release an amount of money from your property’s value. This relatively quick cash release is often used for things like a home improvement project or to pay off a large debt. 

Negotiating a new mortgage can save a lot of money because the offers available right now will often be better than the deal you’re already on. This is because the market changes over time, interest rates fluctuate, and many people start their mortgage on a fixed or discounted rate. Once this honeymoon period ends, the monthly repayments can rise and soar. 

Interest rates have risen several times over the last few months and a new increase has just been announced. People on tracker mortgages or standard variable rate mortgages (SVRs) have already seen their monthly payments increase this year, and these payments will keep going up alongside interest rates. 

 

What does a remortgage mean? 

Remortgaging means getting a new mortgage deal for the same property, but with a different mortgage lender. 

Some people stay with their current mortgage lender and negotiate a better interest rate with them. However, this is known as a product transfer rather than a remortgage, so everything stays the same apart from the amount of money being repaid each month. There are pros and cons to product transfers. It’s often a much easier and quicker process than a full remortgage because the lender has all the information and has done the necessary checks already. However, customers don’t always get the best deal this way. 

If there’s a better deal available with a different lender, it might be worth the extra time and paperwork to do a full remortgage and change providers. 

 

When can you remortgage? 

Many people remortgage when they’ve reached the end of their fixed rate deal or discounted period with their lender. These introductory deals tend to last for two to five years and after that the interest rate switches to the lender’s standard variable rate (SVR). This rate is often significantly higher, making the monthly payments much higher too. Remortgaging for a lower, fixed rate is a good way to save money by keeping monthly payments down. 

People currently on variable-rate mortgages might consider remortgaging as a way to control their monthly payments. Interest rates have risen a lot in a short amount of time and their monthly payments have done the same. 

There are several other factors that drive people to remortgage, such as: 

● Worries about future interest rate increases, so wanting to fix at today’s rate 

● Needing to release equity 

● The property has significantly increased in value so there are much better loan-to-value deals available (for example, when the mortgage amount is 60% of the property value rather than 80%, it’s seen as much lower risk so the customer gets access to better deals) 

● Extra money to invest. There are often restrictions or fees for overpaying on your mortgage, but when you remortgage you can include this extra money and decrease the total mortgage amount you’re asking for. This means paying less interest in the long run too. 

As interest rates are on the rise and are likely to get even higher, many are considering trying to get a fixed rate deal for a long period of time (five years is often the longest you can get). If rates keep increasing as expected, this approach could save a lot of money. 

 

Can you remortgage early? 

It’s definitely possible to remortgage early, even when you’re still in the fixed-rate or discounted part of your mortgage deal. However, there are costs involved and these costs can be significant. Most lenders charge an early repayment fee or an exit fee, so it’s crucial to find out how much this would cost you if you leave your lender early. Once you know how much they’ll charge, you can weigh up whether it’s worth remortgaging now or waiting until you’re at the end of your deal. 

 

How does remortgaging work to release equity? 

Equity means the current value of your home, minus the amount owed on your mortgage. 

Home equity increases as the value of the property rises and as you pay off your mortgage over time. This means that customers start to “own” more of their property, and the percentage they need to borrow for their mortgage decreases. 

If you were to sell your house today, you’d receive the total equity from your property in one lump sum. However, you don’t need to sell your home to release money from it. By remortgaging using its new, increased value, you can release some of the equity and get a cash payment.

For example, you buy your home for £250k using a mortgage of £200k so there’s £50k of equity in your property. Over time, the house value increases and it’s now worth £300, which brings the amount of equity up to £100k. You then remortgage for £250k. You take £40k in cash, whilst keeping £60k of equity in your home. 

The above example doesn’t include any of the monthly mortgage repayments that have been made and these could increase the amount of equity even more. 

Remortgaging to release equity is a great way to get a large amount of money relatively quickly. However, it’s also likely to increase monthly payments and possibly the number of years on your mortgage too. 

 

How to remortgage 

The remortgaging process can take four to eight weeks so it’s worth starting early. 

Before setting things in motion, it’s worth checking the following: 

Early repayment fees 

Find out how much it will cost you if you’re leaving a deal early. 

What’s your goal in remortgaging? 

Lower monthly payments, or a shorter-term deal? This will help narrow your search. 

Check your current credit score 

A new mortgage lender will undertake the same checks as your current one did, so make sure you’re aware of your position before applying to them. 

You can remortgage with a bad credit rating, but the process might be harder or the best rates might not be available to you. You can get advice from specialist advisers when remortgaging with a bad credit rating, and they’ll help find the best possible deal. 

Work out how much you want to borrow 

Use a mortgage calculator to work out how much you’d like to borrow and what this would mean for your monthly payments to make sure you can afford them. 

Factor in remortgaging costs 

There may be administration fees from the new lender, a home valuation cost, and early repayment charges to cover. 

Research the best deals 

Start by looking around at the current deals available and how these would benefit you. 

Mortgage advisers sometimes get access to better mortgage deals than you might find on your own. They’ll also independently assess your situation and advise on the best type and length of mortgage deal for your circumstances. There may be a fee for their services, or they may be fee-free (if they receive commission from the lender). 

Once a provider has been chosen, the lender will provide a Decision in Principle stating how much can be borrowed. The next stage is to complete the full application, which involves a full credit check and submitting all your supporting documentation. The lender will conduct a valuation of your property and the legal paperwork will proceed. 

Once the official mortgage offer has been signed off, you’ll receive a completion date. This is when you’ll officially switch across to your new lender, and they’ll inform you when your first payment is due and how much this will be. 

 

What are the pros and cons of remortgaging 

Remortgaging can save a lot of money because it’s a chance to take advantage of the best deals available right now. With interest rates getting higher, remortgaging is a good chance to get a fixed rate so you know exactly what you’ll be paying over the next few years. 

However, one of the disadvantages to remortgaging is that there are costs involved. For example, early repayment fees can be crippling and make the whole process pointless. Additionally, if your circumstances have changed (like the property’s gone down in value, or you’re earning less) remortgaging could put you in a worse situation, so it’s important to assess your options carefully before proceeding. 

Mortgage advisers often give a free initial consultation, so contacting them is a good way to get a clear picture of where you stand with your current mortgage. It’s also worth talking to your current mortgage provider to see if there’s anything they can offer in terms of a better deal. 

If you’re thinking about remortgaging and need to find out what your property’s worth, then book your free valuation with us now. Once you know the current value of your property, you can assess your options and decide how beneficial it would be to remortgage right now.