Remortgaging is quite common. It’s incredibly rare to find a homeowner who stays with one mortgage deal for longer than a few years.
That’s because there are numerous reasons to remortgage your property, whether that’s switching to a deal with a better mortgage rate or releasing capital without having to sell the home.
However, some homeowners are still confused as to what remortgaging means and how it can benefit them, thereby not taking advantage of it and paying much more on their mortgage than they need to.
This article will explain what remortgage means, when you should and shouldn’t consider remortgaging, and what the process looks like.
What does remortgage mean?
Remortgage means switching your current mortgage deal to another one, either with your current lender or a new one. If you switch to a new deal with your current lender, this will be known as a product transfer and can be completed in as little as four to six weeks.
However, if you switch to a new lender, your debt will be transferred to a different mortgage provider. This involves much more paperwork, which can take up to eight weeks to finalise and complete.
When should you remortgage?
Although you can remortgage whenever you please, there are times when it is considered favourable to do so. This can be when the following applies to your situation.
You are nearing the end of your current deal
Most good mortgage deals are offered on a fixed interest rate for anywhere between two to five years. But once that fixed-rate period is over, you will be put onto the lender’s standard variable rate (SVR).
The SVR is typically much higher than the interest rate you were offered previously. As such, your monthly mortgage payments will increase accordingly and, in most cases, will be significantly higher than what you’re used to.
Before you’re put onto the lender’s SVR, switching to a new mortgage deal with more favourable interest rates can be a good idea. A new deal will mean you can take advantage of a fixed interest rate for another two to five years.
To avoid getting stuck on a standard variable rate, it’s recommended to begin looking for remortgage deals at least three months before your existing deal ends – however, the earlier, the better.
You will have the option to stay with your existing mortgage provider or choose a new lender. Regardless of whether it’s with the same lender or not, it’s essential to select the best deal for you.
Your current rate isn’t the best
This ties into the previous point, but you may find that the current mortgage market has more favourable interest rates than what you’re currently offered.
If you’re still locked in on your current mortgage deal’s fixed-rate period, you will incur fees and charges for paying off your deal prematurely. This will include an early repayment charge, exit, and legal fees.
However, even after these fees have been accounted for, you may still save money overall if the new deal has significantly lower interest rates.
That’s why it’s vital that you are thorough with your calculations to see if it financially makes sense to leave your existing deal early.
The value of your home has increased
Suppose the value of your property has increased since you initially took out your mortgage. In that case, your loan-to-value (LTV) ratio will be lower.
Your LTV ratio represents the amount of money borrowed from your current lender compared to how much your property is currently worth. If you remortgage your property with a lower loan-to-value ratio, you would be offered lower interest rates from mortgage lenders.
For instance, the average house price in February 2020 was £246,739. Just 24 months later, in February 2022, the average house price skyrocketed to £295,888 – that’s almost £50,000 in just two years.
If you bought a property in February 2020 with a 10% deposit, your loan-to-value ratio was 90%. Since then, the property’s value has increased by 20%, whereas your equity in the property has remained the same, which means your new loan-to-value ratio is only 75%.
The same principle applies if you have been repaying your mortgage because you have effectively reduced the amount you have borrowed. The lower the LTV ratio, the less risk there is for the mortgage lender and, thus, lower interest rates on your remortgage.
You want to release equity
When it comes to property, equity is the money you’d receive if you sold the home and paid off the mortgage. If your home has increased in value, you may want to take some of that increase as cash, but you don’t want to sell off the entire property. This is where remortgaging can help.
For example, if you bought your home for £200,000 on a 90% loan-to-value ratio, you would have borrowed £180,000 from your existing lender, making your equity £20,000.
Suppose your property is now worth £250,000. Your equity has increased to £70,000 (£20,000 deposit + the £50,000 increase in value). By remortgaging your property, you can ‘unlock’ your total equity as a lump sum cash payment.
This can then be used however you please, whether that’s as a deposit for another property, putting it towards your retirement, or another investment opportunity.
It should be noted that this can be pretty risky, particularly if you cannot afford to pay the monthly repayments on your remortgage deal.
Interest rates are rising
We started 2022 with a base rate of 0.25%, and at the time of writing this article, it has increased to a staggering 2.25%.
If your current mortgage deal is on a standard variable rate, your monthly payments will have increased accordingly. With the base rate expected to increase even further before the end of the year, your monthly payments could rise even more.
You can safeguard yourself from these increases by remortgaging to a fixed rate. This will keep the interest charged on your mortgage the same for anywhere between two to five years.
However, it does mean that if interest rates decrease over the coming years, you could be tied into a high-interest mortgage deal.
You can’t make overpayments
Some mortgage lenders don’t allow you to overpay on your monthly payments. This can be problematic if you’ve come across an inheritance or just had a pay rise and are looking to pay off your mortgage early.
To solve this, you can remortgage your property and select a new mortgage provider that allows you to pay more than your monthly payments.
You want flexibility
It’s safe to say that most mortgage deals are not very flexible. You are tied into an agreement for a specific period, and you will be required to keep up with monthly payments. For most people, this is a price they are willing to pay to afford a home.
However, life can be unpredictable, and you may find that your circumstances have changed. Suppose you want to travel for some time or are in between jobs and need to take a break from your monthly payments. This won’t be possible under a typical mortgage deal.
Luckily, you can remortgage your home and choose a more flexible mortgage deal that allows you time off from your mortgage repayments. However, these perks come at a cost. Usually, that’s in the form of higher interest rates. Therefore, you need to determine whether a more expensive mortgage deal is worth the freedom you want.
When should you not remortgage?
We’ve discussed when you should consider remortgaging. Still, there are also times when you should consider not remortgaging, as you may be worse off than before.
You already have the best deal
This should go without saying, but if you’re on a great mortgage rate that the current market cannot beat, stay put. It doesn’t make sense to remortgage your property if you’re already on the best deal you can get.
The value of your home has decreased
If the value of your home has decreased, then so has your equity in the property. As such, your loan-to-value ratio has increased.
Remortgaging during this period is not recommended. Instead, you should bide your time, wait until your house price increases again, and then remortgage if necessary.
You will be charged a hefty early repayment fee
Suppose you are in a fixed-rate mortgage deal and want to remortgage your property before the fixed-rate period ends. In that case, you will have to pay an exit and early repayment fee. The exact amount will depend on the value of your loan and how long you have left on your mortgage deal.
If your early repayment charges and exit fees are high, you may find that a remortgage works out more expensive than staying on your current deal.
Your loan amount is small
If the amount of money you’ve borrowed is small, remortgaging your property may not make sense. This is because you may not be saving money after factoring in early repayment charges and exit fees. This is particularly relevant for small mortgage debts, which often come with higher fees.
Your financial situation or credit rating has changed for the worse
Mortgage lenders are becoming increasingly strict with the criteria they use to assess mortgage applications. If you’ve had credit issues recently that have negatively impacted your credit score, or your financial circumstances have changed for the worse, remortgaging your home may not be a good idea.
Often, your remortgage application will be denied entirely. However, if accepted, you may be offered much higher interest rates than otherwise. In this case, it would be best to iron out your credit problems and finances before applying for a remortgage.
How does the remortgage process work?
Unfortunately, the remortgage process isn’t as simple as making a few phone calls and sending a few emails. Luckily, it isn’t complicated either; it just takes some time.
You can expect the remortgage process to take anywhere between four to eight weeks, depending on your exact circumstances, but the process will be as follows:
1. Conduct research on the current mortgage market
The first step involves thoroughly researching what mortgage deals are available on the market. If you are nearing the end of your fixed-term period, you can begin shopping around with all lenders immediately.
On the other hand, if you still have time left on your fixed-rate period, it may be best to ask your current lender first, as they may forgo some early repayment charges if you stay with them.
2. Factor in all the costs related to a remortgage
Remortgaging comes at a price, and there are some costs that you will have to factor into your remortgage decision. These include the following:
- Exit fee – Also called an admin charge, this is paid to your current lender to send your title deeds to your solicitor
- Early repayment fee – This is the cost of ending your mortgage agreement before the fixed-rate period
- Booking/Application fee – Also known as a booking or arrangement fee, this is the price you will have to pay to set up a new mortgage with a different provider
- Property valuation costs – This is the cost of hiring a surveyor to determine the value of your property
- Solicitor’s fee – The cost of hiring a solicitor to facilitate the transfer of your mortgage
Although you may be able to get a better remortgage deal, you may find it costs you more when you factor in the costs of ending and switching to a new deal.
3. Get an Agreement in Principle (AiP)
An Agreement in Principle – also called a Decision in Principle – is when a mortgage lender informs you of how much money you can expect to receive by remortgaging your property.
It is not legally binding and therefore does not guarantee that the lender will lend you that much – if they even approve your application at all– but it can give you a ballpark figure of what to expect.
4. Apply for your remortgage
Once you’re satisfied with your AiP, the next step is to apply for your remortgage. This is where you will be required to submit all the relevant financial and personal documents to the lender, and they will conduct a hard credit check on you.
5. Complete the legal paperwork
As with many things, there is legal paperwork that you must complete before things can be finalised, and a remortgage is no different.
You will need to hire a solicitor’s services to ensure the proper transfer of your mortgage to a new deal.
6. Sit back and celebrate
Once the legal work has been finalised, simply pop open a bottle of champagne and celebrate; you’ve successfully saved yourself a bunch of money.
All that remains is to wait for the completion date – when the old mortgage deal ends and the new deal starts.
Frequently Asked Questions (FAQs)
Absolutely. Sometimes, you’ll be able to find the best deal with your existing lender. However, it’s best to shop around and see which mortgage providers offer the best deals.
Yes, you can remortgage early, but if you are still in the fixed-rate period of your mortgage, then you will almost always be charged an early repayment fee. Depending on how the mortgage lender calculates this, you could be looking at a fee of a few thousand pounds.
From start to finish, the remortgage process usually takes between four to eight weeks. But, sometimes, it can take longer or shorter – the exact time frame will depend on your specific circumstances.