What is remortgaging?
When buying a home, most people take out a mortgage. However, you should not view this as a one-time purchase, but as an ongoing financial arrangement that needs regular attention. The terms of the mortgage deal you are offered may only stay in place for a few years, after which they may change. This can result in higher monthly repayments.
To ensure that you can still afford these repayments – and also keep them as low as possible – you will probably need to seek out new mortgage deals every few years. This is called remortgaging.
Reasons to remortgage
Although a full mortgage term is usually for around 20 to 25 years, a typical mortgage deal will last between two and five years (some lenders do offer ten-year deals). You may therefore have several different mortgage deals over the lifespan of your mortgage.
When a mortgage deal ends, the interest rate will change to the lender’s standard variable rate (SVR). This will usually be higher than the deal rate, and even if it isn’t, it may rise unpredictably.
Here are some reasons why you might want to remortgage:
Your current deal is about to expire, which would push you onto the lender’s SVR
Your circumstances have improved, meaning you might obtain a better deal
Your home has risen significantly in value – this too could result in a better deal
You want to switch to a different kind of mortgage, such as a fixed, capped or tracker
You need a more flexible mortgage, such as one that can let you miss payments or make excess payments (useful if your income fluctuates)
You want to borrow money against your property
What are the costs of remortgaging?
The potential cost of remortgaging will depend on a number of circumstances, including the terms of your current mortgage and the deal offered by your new lender. Just as when taking out a mortgage for the first time, you will find that some mortgage deals have hefty arrangement fees attached, while others may have fewer up-front costs.
The fees to really watch out for, however, are any early repayment fees (also known as a redemption penalty) on your current mortgage. This is not the same as an exit fee (which is usually small) and may be up to 5 per cent of the mortgage value. A large redemption penalty may make the process too costly or just not worthwhile.
This is why, whenever you take out a mortgage, you should always try to think ahead to your next one. It is best to find a mortgage broker who will study the terms of any mortgage deal you’re offered.
Remember too that a redemption penalty may apply beyond the terms of your mortgage deal – for instance, a mortgage might have a two-year fixed rate deal, but charge a penalty if you leave before three years are up. Such arrangements are easy to miss, and can force you to spend one or more years on your lender’s standard variable rate (SVR), which may be very costly.
Is remortgaging right for me?
Even if your deal is about to expire, there may still be good reasons to stick with your current mortgage. For example:
Your outstanding loan is small (e.g. £50,000 or less)
The switching fees may cancel out any potential savings.
Your current mortgage has a large redemption penalty
A large early repayment fee may make it cheaper to keep your current mortgage. However, your current lender may let to change to another of its own deals at a reduced charge.
You have a high loan-to-value ratio
If your equity is low (say, if you’re on a 90 per cent mortgage) then you’ll struggle to get a better deal elsewhere.
Your circumstances have deteriorated
Were you offered your current mortgage based on you (and/or your partner) having higher or more reliable income than you have now? If so, you might not get a better offer (but it’s still worth trying).
You can borrow money more cheaply elsewhere
Although it’s possible to borrow money against your property, it’s rarely the best solution. Consider: if you add £5,000 to a 25-year mortgage at 3 per cent, you’d pay as much in extra interest as if you’d borrowed that £5,000 over 5 years at a whopping 15 per cent. You can definitely find a better finance deal than that.
If you think any of these issues may apply to you, talk them over with your mortgage broker.
How to remortgage
The best way to make a decision about remortgaging is to ask an independent mortgage adviser, or alternatively an IFA who specialises in mortgages. Your adviser can assess your current deal, take your financial circumstances into account and find you the best deal from the whole of the market. They can also alert you to any lock-ins or unfavourable aspects of the deal, so you don’t get caught out further down the line. Making the right choice at the right time can potentially save you thousands of pounds over the mortgage term.
You will usually need a solicitor too to handle the legal side of the transaction.