Reasons for remortgaging
Getting a better rate: Typical reasons for remortgaging tend to be to get a better rate (especially if your initial deal period is over and you are about to revert to an uncompetitive standard variable rate), to consolidate debt or to release equity. You may also have to remortgage if you want to move house. In such a situation, even if your lender will allow you to transfer your homeloan in theory, it will probably require a valuation of the property to ensure it meets its standards.
Remortgaging needn’t only occur when your mortgage term comes to an end. Some people take out a new mortgage simply to save money on their monthly repayments. For example, you may take out a fixed rate mortgage only for interest rates to plummet, leaving you stranded on a higher rate. Remortgaging to a more competitive rate in these circumstances may make financial sense.
Bear in mind that remortgaging is not a cost-free process though. Your current mortgage may carry penalties or charges if you try to leave it early, plus there will probably be costs associated with the new deal, so factor all of this into your decision.
In the past, remortgages were popular as homeowners sought to withdraw equity from their properties to fund the likes of home improvements or holidays.
In the current economic climate with slowing house prices and higher interest rates, this is not such a common occurrence and a remortgage should really be driven by need rather than luxury.
The sub-prime remortgage
If you had an impaired credit record (you may have previously been declared bankrupt or received a County Court Judgement) and took out a sub-prime mortgage in the past, you are likely to be paying a higher interest rate than a mainstream mortgage as you represented a higher risk to the lender.
But the intention of sub-prime mortgages is rehabilitation. If you have been successfully making your monthly mortgage repayments for a number of years, and you have managed to build up sufficient equity in your property, when you come to remortgage it will make it more likely that you will be able to access a standard mortgage deal.
But do bear in mind that, as many lenders have pulled out of the sub-prime mortgage market, if you have not repaired your credit rating that could make it difficult, or perhaps even impossible, for you to remortgage.
As a result of the credit crunch, a number of lenders pulled their larger loan-to-value (LTV – the amount lent as a percentage of the property’s value) mortgages in spring 2008. All 125% mortgages were abolished, meaning that borrowers could no longer obtain loans for more than the property’s worth.
Although this wasn’t good news for first-time buyers, it also reduced the chances that borrowers already on such deals would be able to get similar percentage loans when they came to remortgage.
You may find that you need to build up more equity in your property before you can remortgage as most lenders will only offer a LTV of 80% at the moment.
Lenders are being tighter with who they lend to and how much they lend given the current economic situation, so if you bagged yourself a good mortgage deal a couple of years ago, don’t necessarily expect a similar rate this time round.
How to remortgage
If you are staying with your existing lender, then remortgaging should be relatively straightforward. Your lender will probably contact you before your mortgage term expires to talk through your options. If not, you can get in touch with them.
If you feel a bit overwhelmed by the choice, then you may like to enlist the help of a mortgage broker. Not only will they be more adept at finding the right mortgage for you, they also have access to products that aren’t available direct to consumers.
All mortgage brokers are regulated by the Financial Services Authority, meaning they are bound by a code to treat customers fairly. They have to find the deal that is right for each borrower and can not just recommend products that may be lucrative for themselves.
Bear in mind that they may charge for their services, which could be a factor in whether you choose to go it alone or not. What to bear in mind when remortgaging
1) What remortgage deals are available and what should I be looking out for?
2) What rate of interest will my product carry?
3) How much will I save, if anything, on my new mortgage rate?
4) What is the standard variable rate (SVR) that the mortgage will revert to?
5) What are the new monthly repayments?
6) What is an annual percentage rate (APR)?
7) Are there any early redemption charges (ERCs) or exit penalties?
8) Does the mortgage carry any arrangement fees?
9) How long will the whole remortgage process take?
10) Can I remortgage more than once?
1. What remortgage deals are available and what should I be looking out for?
Remortgage products come in many different shapes and sizes – fixed rates, capped rates, discounts, cashbacks, flexible deals and Base Rate trackers, for example.
Make sure the new lender or adviser explains the pros and cons of whichever deal or deals you are interested in. And don’t just look at the headline rate, consider all the different parts of the mortgage.
2. What rate of interest will my product rate carry?
Whatever type of remortgage deal you opt for, the lender or adviser should tell you what interest rate you will be paying and, in the case of a fixed or capped rate, how long this rate will apply for.
3. How much will I save, if anything, on my new mortgage rate?
If you are remortgaging onto a better deal, the lender or broker should be able to show you how much you will be saving per month (unless you are increasing the size of your mortgage at the same time, in which case repayments might not be coming down).
4. What is the standard variable rate (SVR) the mortgage will revert to?
If you are going for a discount, fixed or capped rate you may have to pay the lender’s SVR when the mortgage deal finishes. While, as the name suggests, variable rates vary over time, comparing today’s SVR with that charged by other lenders may give you some idea of how competitive your new lender is in general.
5. What are the new monthly repayments?
The adviser should tell you exactly what your monthly payments will be at the rate quoted. In addition, make sure they show you how much you would be paying at the standard variable rate to give you an idea of what you will be paying after your product term comes to an end. You can also work your new repayments out for yourself using our mortgage calculators.
6. What is an annual percentage rate (APR?)
The annual percentage rate (APR) has to appear in all adverts alongside the headline mortgage rate. APRs are meant to provide customers with a true reflection of the cost of the loan, and help you to compare different deals. However, in practice the APR is unreliable and no substitute for individually-prepared quotes listing all upfront and ongoing costs.
7. Are there any early redemption charges (ERCs) or exit penalties?
Most mortgage lenders apply early redemption charges (ERCs) to certain deals, such as fixed rates and discounts, for example.
An ERC is usually calculated as several month’s interest on a loan, and can run to thousands of pounds. You may be charged an ERC if you pay off or switch your mortgage within a certain time period. Before you remortgage, check whether ERCs apply to your existing deal, and if so, how much they will cost. Exit fees are charges levied when you move to a new lender.
8. Does the new mortgage carry any arrangement fees?
The average product fee on a mortgage is now around £1000, so be prepared to factor this into your budgeting when you are remortgaging. Some lenders are so keen to get or keep your business that they developed special remortgage packages with no fees, but these are less common in the current economic climate.
9. How long will the whole remortgage process take?
How long is a piece of string?
If there are complications, it may take some time to sort out a new deal. Most people who have remortgaged in the last year have sorted the whole thing out in a week, and some within a number of days. Your adviser should give you an idea of the time-scale involved. If you aren’t using a broker, you will have to rely on your lender’s estimate.
10. Can I remortgage more than once?
You can remortgage as many times as you like, and as often as you like. But bear in mind that you may well be liable to pay ERCs if you are currently on a fixed, capped or discounted rate. And you may have to pay arrangement fees. But you should look at your mortgage every year and see whether remortgaging would save you money.