If you’ve got a mortgage, chances are you’ve heard of remortgaging. But what exactly is it? Why would you want to do it? And how does it all work? Don’t worry, you’re in the right place! Here, we’ll answer all your questions about remortgaging and turn you into a total pro. Fasten your seatbelt!
What is remortgaging?
Remortgaging isn’t as complicated as it might sound. It’s simply swapping your current mortgage for a brand new one.
If you’re like most people, you probably shop around for the best deal on your mobile phone contract or your electricity bills. Remortgaging is pretty much the same but with mortgages!
You can either switch to a new deal with your current mortgage lender or take out a mortgage with a new lender altogether. By doing so, you could save thousands and thousands of pounds over the course of your mortgage (aka your mortgage term). Or, you could get some much-needed cash in your pocket by taking out a bigger mortgage than you have right now. We’ll explain it all below!
Why should I remortgage?
There are tons of benefits of remortgaging. Most of them centre around getting a better deal and saving money. But you may also want to take out a new mortgage with more flexibility, or to take out a bigger mortgage so you can get some money to spend on something else, like a holiday. Here are the main reasons to remortgage.
1. Your fixed-rate period is coming to an end
If you’re on a fixed-rate mortgage like most people, your monthly repayments will be set at a fixed price for a certain period of time. Lenders call this the incentive period, as the rates you get will often be discounted to encourage you to sign up with them. Normally, this will be for 2 or 5 years, but it could be longer.
When your fixed-rate period ends, you’ll automatically be moved onto your lender’s standard variable rate (SVR). Basically, this means your repayments will skyrocket and your lender can move them up – or, if you’re luckier, down – whenever they want. Not ideal!
But by taking out a new fixed-rate mortgage instead, you get to benefit from that lovely lower-priced incentive period all over again! Plus, because you’ll (usually) have paid off part of your mortgage by this point, you could find you get an even better deal than the one you were on in the first place.
It’s a massive cash saver and you should be doing this every time your fixed-rate period ends – according to the Evening Standard, remortgaging to avoid falling onto a lender’s SVR saves the average homeowner £4,500 per year. Not bad, eh?! Read our article on what happens when your fixed-rate period ends to find out more.
2. To get a better rate
Even if you’re not on a fixed-rate mortgage, it’s always a good idea to keep your eyes peeled for better deals. Here are some of the times you should think about remortgaging to get a better rate.
- Your loan-to-value ratio has changed: Loan-to-value (LTV) refers to the percentage of your property’s value that you own outright, in comparison to the percentage you still owe your mortgage lender. For example, if you paid a deposit of 10% of your property’s value when you first bought it, you’d have an LTV of 90%. That’s because you borrowed the remaining 90% of the property’s value. As you pay off your mortgage, your LTV will usually get lower. When you fall into a lower bracket, you can get access to better deals.
- Your property’s value has increased: If your property’s value has gone up a lot, you’ll have gained a ton more equity (equity refers to how much of the property you own outright). Property prices normally rise over time, but you could also increase your property’s value by doing work to it, like building an extension. The more you own and the less you still owe your lender, the better a deal you could get on your mortgage as you’ll fall into a lower LTV bracket.
- Interest rates look like they’re going up: If you’re not on a fixed-rate mortgage, your monthly repayments will be liable to go up and down without much warning. Generally, this will happen roughly in line with the Bank of England’s base rate (the official borrowing rate). If this looks set to go up, you could save money by switching to a fixed-rate mortgage, which would freeze your interest rates (and therefore your monthly repayments) for a set period of time. Just be careful though as interest rates can be hard to predict, and they may go back down again. So, you’ll be taking a bit of a punt!
Sounds good, right? However, don’t jump in too quickly! Remortgaging can come with fees (we’ll break these down a bit later), so you’ll still need to weigh up the potential savings against the potential costs to make sure it’s worth it. If you’re not a fan of maths then don’t worry – a mortgage broker can do all the sums for you (potentially for free if you pick wisely!).
3. To release equity
In need of some cash? If you’ve built up enough equity in your home, you could take out a new, bigger mortgage to cover more of the value of your property and therefore reduce the portion you own outright. This will unlock some cash that can go straight into your pocket.
Imagine you own 40% of your house outright and you owe your lender 60% of its value (known as a 60% LTV). If you swapped this for a 70% LTV so that more of your house’s value was covered by your lender, you could get the 10% difference paid to you in cash. Kerching!
This can be a great way to pay for home renovations or to fund an extension. After all, doing work to your house could increase its value, gaining you more equity in the long run (our guide on how to remortgage for an extension has the full lowdown). That said, you could use the money for absolutely anything – to pay for your child’s uni fees, to buy a new car, to pay for a fancy holiday… you don’t actually need to provide a reason!
Just bear in mind that remortgaging to release equity involves taking out a bigger loan. And bigger loans come with higher interest rates, which can add thousands of pounds to your repayments over the lifetime of your mortgage. You may also end up with a worse deal if remortgaging means moving to a higher LTV bracket. So, be careful. It’s often more expensive than it first seems.
4. Get a different type of mortgage
You know what life’s like – things change. When you first took out a mortgage, chances are you picked a mortgage type that worked for you there and then. That doesn’t mean it’s the best type of mortgage for you now!
For instance, most fixed-rate mortgages won’t let you overpay on your monthly repayments. If you’ve suddenly come into a load of cash, you might want to switch to a different kind of mortgage that allows overpayments. That way, you can pay off your mortgage quicker and reduce the amount of interest you have to pay overall.
Similarly, you may have taken out an interest-only mortgage (where your monthly repayments only cover the cost of the interest, rather than the loan itself). If your circumstances have changed, you might want to switch to a repayment mortgage instead, so you can build up more equity (although your current lender will usually be happy to make the change for you, so you might not have to remortgage).
Another option is that you might want a more flexible mortgage that allows you to take payment holidays (where you skip repayments for a month or so). This is likely to cost more, but that might be worth it for you depending on what you’re looking for.
Ultimately, circumstances change and often you end up needing something you didn’t quite expect when you first bought your home. Remortgaging can help you to keep your mortgage up-to-date with your needs.
Why shouldn’t I remortgage?
Okay, okay. So we know we said remortgaging can be great. And it can! But it’s not for everyone. Here are some of the times where you might be better off not remortgaging.
- You have high early repayment charges: If you’re in the incentive period of your fixed-rate mortgage, you’ll face high fees for leaving early. This often means that remortgaging for a better rate just isn’t worth it (although every situation is different!). Ideally, you’ll want to remortgage right when your incentive period ends, so that you don’t have to pay any early repayment charges but you don’t fall onto that dreaded SVR we told you about either!
- You only owe your lender a small amount: Once your debt falls below £50,000(ish) it may not be worth remortgaging anymore. The amount you save from the switch probably won’t save you enough to make up for the fees you’ll have to pay (we’ll cover these in a minute). Plus, many mortgage lenders won’t give out mortgages for less than £25,000.
- You don’t have much equity: If you don’t have much equity in your property, it might be harder to find a better deal. This is particularly true if you’re on a 90% LTV or higher. So, you may prefer to wait until you’ve built up more equity (unless you’re on a fixed-rate mortgage and your incentive period has come to an end. Then, you should (almost always!) remortgage, remortgage, remortgage!).
- Your home’s value has dropped: If your home’s value has dropped drastically, you could end up with negative equity. This is where you owe the bank more than your house is actually worth. Eek! Negative equity can make it really hard to get a new mortgage so you’ll usually want to sit tight and wait until property prices in your area go back up.
- Your circumstances have changed: When you apply to remortgage with a new mortgage lender, they’ll carry out all the same checks you had done when you first got a mortgage. So, if your salary has dropped or you’ve recently built up a bad credit score, you might have trouble getting approved. If this is the case, you might just have to stick it out with your current lender until you can improve your application.
- You’re moving house shortly: If you’re planning on moving house soon, the last thing you want to do is tie yourself into a new fixed-rate mortgage. Yes, the rate may be lower, but you’ll be hit with a large early repayment charge once you leave. So, if it’s only a matter of a couple of months, you may be better off paying those higher rates for a while.
When is the best time to remortgage?
You ideally want to plan a remortgage so that your new mortgage starts immediately after the end of the initial period of your current mortgage - and by immediately, we mean the very next day!
To do this you should start looking to remortgage about 6 months before the end of your fixed term deal, i.e. 18 months into your mortgage that has a 2 year fixed initial period.
Why? Because it can sometimes take a while for a mortgage application to actually go through – a remortgage is actually applying for a new mortgage, the process is similar to when you bought your house but without all the pain of actually finding and moving home, or dealing with slow conveyancers!
But don’t worry if you haven’t got 6 months left to go, anytime before the expiry date of your mortgage deal is fine. Just try not to miss it or you will move onto your standard variable rate and start paying more interest and higher monthly repayments.
How much can I borrow when I remortgage?
A remortgage is no different to the mortgage you got when you first bought your house. So, you can usually borrow around the same amount (as long as your circumstances haven’t changed). That’s roughly 4.5x your total income.
Got a pay rise since then? Or want to get a mortgage with a partner? If that’s the case, you may even be able to borrow more, which could be handy if you’re looking to release equity. But don’t forget – you’ll want to avoid borrowing so much that you end up slipping into a different loan-to-value bracket, otherwise your rate could get a whole lot more expensive!
Do I have to pay a fee to remortgage?
Okay, so this is important: even though you can remortgage whenever you like, if you remortgage during the incentive period of your fixed-rate mortgage, you’ll be hit with an early repayment charge.
Normally, this will be the same percentage as the number of years left on your incentive period – if you have 2 years left, you’ll face fees of around 2%. We don’t mean to scare you, but that’s a lot! So, you’ll probably want to wait until your fixed-rate period is up.
On top of this, you may have to pay an arrangement fee for the new mortgage. Sometimes, you won’t have to pay anything at all, but you could end up having to pay over £1,000. Yes this might seem like a lot, but don’t let it put you off. Assuming you’re remortgaging to get a better deal, you should end up saving a lot more than that over the course of your new mortgage term.
There might also be an admin fee for leaving your current mortgage, sometimes called a ‘deeds release fee’. But this isn’t usually big so it’s not normally something to worry about.
The good news is you don’t have to fork out for a solicitor or any costs related to moving home. Instead, you can just go straight to a mortgage broker and they’ll be able to do it all for you. Some of them will even do it for free!
Remortgaging when self-employed
Recently become self-employed? Congrats! However, it’s not all good news when it comes to remortgaging.
When you apply to remortgage with a new lender, they’ll carry out all the same checks that you had done when you first applied for a mortgage. That means they’ll sneak a peek at your credit score, your expenses and, surprise surprise, your income!
Unfortunately, it’s a little harder for self-employed people to prove their income, mainly because you won’t have an employer who can confirm your salary. Your income may also vary from month to month, which can lead mortgage lenders to worry about whether you’re going to be able to consistently afford your repayments (check out our guide to self-employed mortgages to learn more).
Don’t get us wrong, you can remortgage when self-employed. It’s just that if you want to switch lenders, it’ll help to have been self-employed for at least a couple of years first, as they’ll want to see your accounts from the last 2 or 3 tax years before approving you.
If that’s not possible, don’t worry. There are lots of lenders out there, including some that specialise in mortgages for the self-employed. Have a chat with a mortgage broker to see if they can help you find one that fits your criteria.
Even if you can’t find a good deal with a new lender, you’ll usually be able to remortgage with your current lender without a problem, as they can treat your application as a straight-up ‘product transfer.’ This means they can simply swap your mortgage to a new one, without having to carry out further checks. Happy days!
So, should you remortgage?
If you’re coming to the end of your fixed-rate mortgage, the answer is almost always yes. Your lender’s SVR will usually be a lot more expensive than the rates you’re used to paying. And no-one likes paying more than they have to!
If you’re not coming to the end of a fixed-rate mortgage, however, the answer will depend on why you’re doing it. If you’re remortgaging because you’ve found a better deal then hurrah! That totally sounds worthwhile, as long as you’re not going to be hit with massive fees. If you’re remortgaging to release equity, the answer will depend on how badly you need to unlock that extra cash, and whether you’ll be able to afford the higher interest rates you’re faced with as a result.
Ultimately, only you can decide whether remortgaging is right for you. But a mortgage broker will be able to help! Here's how to find the right one for you.
How to remortgage
If you’re coming to the end of a fixed-rate mortgage, your lender will probably get in touch early to coax you into staying with them. But hold fire!
It’s always worth comparing the market, just as you did with your first mortgage. There are over 12,000 mortgages out there from more than 90 lenders, and you want to make sure you’re getting the best deal.
For that reason, the first step in our books is always to talk to an independent mortgage broker. They’ll not only find the best deal for you, but they’ll handle the whole remortgage process for you from start to finish.
We’re serious! They’ll sort out the application for you while you just sit there twiddling your thumbs. Then, roughly 4 to 8 weeks later, voila! Your remortgage will be complete. It really is that easy to save hundreds of pounds per month. Yep, you read that right – not per year but per month! (Or, if you take out a bigger mortgage to release some equity, it really is that easy to give your bank balance that boost it needs!).
Ready to remortgage?
So, what do you think? Are you ready to rescue yourself from your lender’s dreaded SVR? To get a better deal that could potentially save you thousands of pounds? To get some much-needed cash in the bank by taking out a bigger mortgage?
Whatever your reasons for remortgaging, start by finding an independent mortgage broker who’ll be able to advise you and find you the best deals. You’ll be swigging champagne out of the bottle before you know it!