Let’s imagine you have a typical mortgage in the UK, which looks something like a 2 year fixed rate mortgage on a 25 year term.
Which means the mortgage is 25 years overall and it has a lower introductory rate that is fixed (won’t change), for 2 years.
After the 2 years, the mortgage will automatically move onto the higher ‘normal’ rate of your mortgage. This is called a standard variable rate (SVR).
Typically the initial fixed term rate, the rate for the first 2 years, is between 1% and 2%, but the standard variable rate, is between 3% and 4% (Bank of England, 2020). This means your rate could nearly double, to put that in perspective, your monthly repayments could double!
So why is there a fixed term period with a lower rate at all? Well, it’s all down to competition in the mortgage market from lenders (the company lending you the money, typically a bank or building society).
You know all those comparison tables of mortgages? Well, if you have a lower rate you appear at the top. Simple and effective marketing.
Lenders cheat the system with an introductory rate, and then raise the rate after. To compensate for the lower rate, they normally have an arrangement fee (also called lender fees) as well, which can range from £0 to £1,000s – which is not reflected in the rate.
To counteract this, you should be looking at the total cost of the mortgage over the initial term (the 2 years in this example), which can get complicated doing yourself, and is why we recommend using a mortgage broker.
So when is the best time to remortgage?
You want to plan it so 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!
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 is this? Because it can sometimes take a while for a mortgage application to actually go through – don’t forget 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.
It’s also a very good idea to get your other finances in shape, i.e. reduce debt, stop the frivolous spending and reduce anything detrimental on your current account, such as payments to gambling sites. If you can do anything to improve your credit score, you should. (Have you registered to vote? This is a great quick win to improve your credit score.) 6 months gives you some room if something needs improvement.
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 mortgage’s standard variable rate and pay more interest and higher monthly repayments.
Early repayment charges
You might be wondering why you can’t remortgage at any point before your fixed term period ends. Well you technically can, but typically you would be charged a fairly hefty fee for repaying your mortgage early (to then get a new one).
This is called an early repayment charge (ERC), and is typically between 1-5% of the mortgage amount, and typically staircases down as the years go by, so on a 2 year fixed term mortgage, the first year might be 2% and the second year might be 1%.
It’s typically not advised to remortgage if you have to pay these fees, but they normally disappear after the introductory period ends – which makes it the best time to remortgage.
How to remortgage
So what do you actually need to do? We always recommend using a mortgage broker to remortgage.
Your lender is more than likely going to phone you or send a letter at some point before your deal ends asking if you want to remortgage to a new mortgage with them. This is normally not the best deal for you.
You should speak to a mortgage broker who can find you a new deal from all UK lenders – not just deals from your current lender.
And better yet, mortgage brokers can sometimes get access to deals from your current lender that you can’t by going direct, it’s weird but true! So it’s always worth at least checking for deals with a mortgage broker. There’s no commitment or credit checks until you decide to apply for a mortgage, so it’s safe to have a look.
Your mortgage broker can arrange for your new mortgage to start immediately after the end of your initial term, so you never pay an early repayment charge or go onto your standard variable rate!
It may sound complicated but it’s really straightforward, and your broker will do everything for you. And you will be much better off – by an average of £344 per month according to Trussle.