A remortgage is when you take out a loan on a property on which you already have a mortgage. Quite simply, this replaces your existing mortgage with another, which can be done because your existing product is coming to the end of its term, you want a cheaper rate, you want to change the terms of your loan, or you want to borrow more money for things like home improvements.
Given the fact that interest rates are low at present and the Bank of England is talking up the prospect of them raising the Bank of England Base Rate sooner rather than later, many borrowers are now reviewing their options in order to lock into the current crop of low rates before they potentially disappear.
But what are the benefits of remortgaging? And is it always a good idea? Allow us to explain and offer clarity on whether a remortgage is the right decision for your particular circumstances.
To save money on a better mortgage deal
In our blog, Remortgages: Top 3 Things to Consider, we talked about the Loan-to-Value percentage (LTV). To summarise, the LTV is the amount you borrow compared to the value of the property. For instance, if you are paying a 5% deposit, the loan you need for the property is 95% of the value of the property, or 95% LTV. There are two reasons why a 95% LTV mortgage will be more expensive for the borrower: firstly, because the amount you are borrowing is larger and therefore you need to pay interest on a higher figure, and secondly because your loan represents more risk for the lender and, therefore, they will offer a higher interest rate to justify the risk.
It’s the LTV that means you could be eligible for a better value loan some way into your mortgage. Once you have been paying back your mortgage for a while, the total debt you owe will reduce, but you’ll still be paying the same interest based on your original offer. With some of the debt paid off, you have enough equity to afford a better mortgage deal. For instance, if you’re paying a 20% deposit (an 80% LTV) then you can expect a better interest rate on your mortgage compared to what you currently have for the remainder of your debt.
First-time buyers are particularly likely to benefit from a remortgage because, without equity in an existing property, they are less likely to have the funds to provide more than 5% or 10% of the deposit when they apply for their original mortgage.
Your deal is coming to an end
Many lenders now expect you to remortgage after your existing deal expires, which is why they will often offer you a tempting interest rate for a set period of time, such as 1.99% for the first five years of your 25-year mortgage. After the deal period has come to an end, the interest will usually go up to a typical variable rate, which is likely to cost more than other deals available on the market.
Once the deal is coming to end, it’s a good idea to search for alternative finance that could save you thousands of pounds. Do your calculations, though, because most lenders will charge you for paying back a mortgage early if you do not time it right to match the end of your existing deal. This number is usually about 5% of the remaining debt, as well as a possible exit fee between £75 and £300, and you may need to return some of the incentives you were originally offered.
It can be expensive to leave a mortgage early, but given the low rate environment we have at the moment, it may be less expensive than staying with a costly mortgage deal in the long run!
You want to borrow more
If you need to borrow more money, you could use the equity you have gained since paying back your mortgage (or the effects of rising house prices) to get a new, larger mortgage. This might appeal to you if your income has increased or the value of your house has gone up.
The reason you want the money will actually have an impact on the likelihood of your remortgage, but as long as you’re not attempting to use it to start a business, it shouldn’t be a major factor. If you’re borrowing to make home improvements, make sure you get some quotes on the construction.
You might also be looking to consolidate your debts, and a remortgage can be a way to pay off any outstanding borrowed monies. For instance, if you have a large credit card debt, a remortgage can help pay off that debt and will leave you with significantly less interest than credit card loans.
However, it is important to get specialist advice here as you are swapping short-term debt for longer-term debt which may well be cheaper month to month but may mean that overall you pay more interest over a longer period.
You want to change your mortgage terms
There were many borrowers who started life with an interest-only mortgage, where the monthly payments do not actually bring the loan amount down at all. We often find that when it comes to remortgaging, borrowers are now in a better financial position and with rates so low, can now afford to put part or all of the loan on a full repayment basis to start reducing the loan balance.
It is also an opportunity to assess your monthly affordability and potentially reduce your loan term which could save you thousands of pounds in interest and help you repay the loan 5 or even 10 years earlier.
You may also have a lump sum in savings that you wish to keep but use more effectively. This is where an Offset Mortgage can be extremely beneficial, utilising your savings to help reduce your mortgage payments or reduce the loan term without losing access to them.
Why shouldn’t you remortgage?
Remortgaging might sound like a great idea at the moment, but bear in mind that the above examples assume the value of your property has increased. Here is a list of circumstances where, if they apply to you, you will need to speak to a professional to ensure your next step is in your best interests and give you the best chance of being approved for a remortgage if you do decide to follow through.
- Your property has fallen in value
If your house has dropped in value since the mortgage, you may be losing money if you try to remortgage. If you borrowed at 90% LTV, then the drop in value of the property could mean that’s now 95%, or even 110%, leaving your property in negative equity. In these cases, it might be cheaper not to remortgage until the property value increases.
- You have a very small debt
If you don’t have much to pay on your mortgage, it may be that the total you have to pay back with interest will be more than the cost of a remortgage, considering the associated fees that may be involved. Although most remortgage products do now come with a free valuation and free legal it is worth doing the sums carefully. You might also have trouble getting a mortgage if your loan amount is too small, as lenders don’t often want to give out loans smaller than about £30,000.
- If you have a poor credit rating
The credit crunch had an impact on how lenders assess to whom they will lend. It’s now required by the Financial Conduct Authority that they check the mortgage is affordable for the customer – not just at current rates but also at higher rates, in order to cover the event of an interest rate surge. This is why having a good credit rating is important when applying for a mortgage; even one missed credit card bill will have a negative impact on your chances for a successful application. Make sure you’ve checked your credit rating before you think about applying for a remortgage.
Many lenders now have ‘Retention Products’ you can switch to that are cheaper than doing nothing and just moving on to their Standard Variable Rate. We can help advise you as to whether it is best to remortgage elsewhere or to switch onto one of these retention products with your current provider.
In summary, remortgaging your property can be incredibly rewarding and save you thousands of pounds over the duration of the loan term. But that doesn’t mean it is necessarily the right course of action for your circumstances. If you are thinking about remortgaging your property, get in contact with us and we’ll be glad to guide you through your options. If it turns out a remortgage isn’t in your best interests, you can tell us what you need and we can help you find an alternative solution.