Unless you are a cash buyer, you will have to face the struggles of getting a mortgage and making repayments for a good part of your life. It will also complicate the conveyancing process.
Further, in almost all types of mortgages, you will eventually be paying a lot more than the property was worth (due to interest and other factors involved). However, you can save yourself thousands of pounds by choosing the right type of mortgage for you and, in the end, own a vital asset.
Another good thing is that there are numerous mortgage products provided by various mortgage lenders that you have to choose from, such as fixed rate mortgage, tracker mortgage, or a discounted mortgage. Each type has its own advantages, but, essentially, they make the mortgage more affordable.
However, such deals last anywhere between 2 and 10 years (and by that time, better competitive deals may be available). Once the deal ends, you will be on your lender’s standard variable rate, which, as explained in our other article, should be avoided as much as possible.
Or perhaps after 5 years, you have paid a substantial part of the loan, and you want to free some equity in your home to make home improvements or pay off other debts. Or you just want to repay the mortgage faster, but your current lender won’t allow overpayments.
You may want to think about remortgaging in all such times (and others that we will shortly get to).
However, remortgaging is not suitable for everyone. In this article, we will tell you what is remortgaging, discuss the circumstances in which you should consider remortgaging, as well as the circumstances in which remortgaging should be avoided.
What does remortgage mean?
In simple terms, when you remortgage, you will be swapping your existing mortgage for another. Now, this can be a new mortgage deal with the same lender or a different mortgage lender.
When done right, remortgaging can get you on a better deal suited to you and saves you thousands of pounds.
When can I remortgage?
You would want to make that switch for several reasons, but the most important question is whether remortgaging will cost you less.
Will it actually cost you less to remortgage?
If your initial deal has not yet come to an end and you want to remortgage, you will probably have to pay a repayment charge which can be between 2%-5% of your outstanding mortgage. Additionally, there will be a small exit fee.
If you switch to another lender, you will also be charged arrangement fees.
When you put all those costs of remortgaging together, you need to strike a balance between paying the early repayment fee once (and the other fees associated with remortgaging) and the savings you can make on a cheaper deal.
We have summarised the circumstances in which you should consider remortgaging below, but we will get to those in a bit. First, it is important to understand how much it will cost for your to remortgage.
Remortgage fees – How much will it cost to remortgage?
As it is always important to actually work out the cost you will incur when remortgaging, we have explained the different remortgage fees you will incur, depending on your circumstances.
1. Early repayment charge
All mortgage deals you will come across will have a tie in period. For example, if you get a fixed rate mortgage, then for a fixed term, you will only have to pay the agreed interest rate.
At the same time, if you want to exit during the fixed term, your mortgage lender will likely require you to pay early repayment charges.
So basically, you will be penalised if you break your current mortgage deal early (although the charging period can be beyond that point). Further, early repayment charges can be anywhere between 3%-5% of the total outstanding mortgage. However, they often step down each year.
In some circumstances, you might have to have an early repayment charge for changing to a different fixed rate mortgage product before your current deal expires.
The exact terms regarding the early repayment charge will be set out in your mortgage dead.
1.1. What can you do if you are unhappy about your early repayment charge?
Although we hope you don’t, you may find yourself in circumstances where:
- you think that the early repayment charge is unfair or too much
- your lender did not tell you about the early repayment charge when you initially got the mortgage
- you were not told by your mortgage lender about any early repayment charge when you asked them directly about paying some of (or all of) your mortgage.
- your lender has turned down your application to transfer to another fixed rate mortgage product and has made you pay an early repayment charge since you had to take out a mortgage with another lender.
- the time left on the fixed rate period merits it unfair for you to pay an early repayment charge
- you were asked to pay an early repayment charge after you have been repossessed.
In such circumstances, you can make a complaint to the Financial Ombudsman.
If your complaint succeeds, the Ombudsman can require the mortgage lender to:
- waive or refund some (or all) of the early repayment charge
- pay you compensation for any additional costs
- compensate you for the troubles you have experienced.
2. Mortgage exit fee
In this section, we will explain the mortgage exit fees. Different lenders have different names for it. Some call it mortgage account fee or redemption administration fee, but they are all essentially the same.
2.1. What is a mortgage exit fee
Exit fees is essentially a fee you will have to pay to your mortgage lender when you remortgage or move to a different mortgage lender before your current deal expires.
3. Mortgage arrangement fee
Again, different mortgage lenders have different names for it. Some call it product fees, admin fees, or application fees.
Mortgage arrangement fee is an amount you will have to pay to the mortgage lender for arranging the credit or setting up the mortgage.
It can add a significant amount to your total remortgaging cost.
4. Remortgaging legal fees
Remortgaging also involves a lot of paperwork, particularly if you are moving to a new lender. In such cases, the original lender’s interest in the property will have to be transferred to the new lender (called “conveyancing”). The conveyancing process will either be carried out by a solicitor or a licensed conveyancer.
Some mortgage lenders don’t charge remortgage legal fees and other a free legal package, whereas others do.
Read our article to gain a better understanding of conveyancing process when remortgaging.
5. Valuation fee
Each mortgage lender will require the property being mortgaged to be valued by having a survey carried out. It is different from a home survey a buyer carries out before purchasing a property, such as a Homebuyers survey.
Some mortgage lenders don’t charge for it, whereas others do. If your mortgage lender charges a valuation fee, it will typically depend on the property’s value.
We have summarised the different fees you may incur when remortgaging. So when you get to working it out, it is vital for you to do the math down to the last decimal.
Some of these costs can be added to the mortgage (some can’t), which will increase your overall loan and hence the amount you have to pay interest on (and may end up costing more over the mortgage term).
Why remortgage – when should you consider remortgaging?
Now we will get to the common scenarios in which you should consider remortgaging.
1. To avoid lenders standard variable rates
When your current mortgage term is nearing its end, you will be put on your lender's standard variable rate.
The rate set by lenders is almost always much higher. Consequently, your mortgage repayments on your mortgage will significantly increase as most of it will be going towards making interest payments.
2. To release equity in your house
As you continue to make your mortgage monthly payments, you will build up “equity” in the property. In simple words, with each repayment, you will increase the portion you own.
If you require some more money, you can get a mortgage out on that portion (by remortgaging). However, increasing your debt is not something that should be taken lightly.
2.1. Should you increase your debts?
Ideally, you should only be considering releasing equity by remortgaging if you already have built up a significant amount of it in the first place. Further, if you have built up more equity, you want to consider looking for cheaper mortgage deals (which we will get to next).
3. To find a different deal
You may have found a good deal when you first got the mortgage. However, your loan-to-value ratio (LTV) will typically be higher when you initially get the mortgage meaning that you will be offered higher rates.
3.1. What is loan to value ratio?
LTV is the difference between the loan amount and the current market value of the property. It is an important figure which lender’s use to assess risk before approving a mortgage and deciding what terms they will offer you.
For example, if you had put down a 5% deposit, you owned 5% outright at that point. As continue to make your mortgage monthly payments, you might come to owe 30% outright. While your original LTV was 95%, it will decrease with each repayment after a few years, and now you may only need to borrow at 70% LTV mortgage.
3.2. Lower LTV – switch to a cheaper mortgage deal
So as you build up more equity, your LTV will lower, and resultantly you will be more likely to find cheaper mortgage deals that offer lower interest rates. However, it is vital to actually do the sums to see if the deal will actually cost you less in the long run.
3.3. Switching from interest only mortgage to capital repayment mortgage
You may not have to remortgage to do this, and your lender should be willing to make that change.
However, if it’s the other way round and you are on a capital repayment mortgage, expect your lender to be formidable.
4. You want to pay the mortgage faster
Since you first got the mortgage, your financial circumstances may have improved, and you want some flexibility in your mortgage payments (such as paying off the mortgage faster).
You can remortgage and switch to another deal or a lender that allows you to make larger overpayments.
5. Changes to Bank of England base rate
If you are on a tracker mortgage, it will be tied to the Bank of England base interest rate. Changes in the base rate also affect your mortgage repayments. So you may want to switch to another type of mortgage. As always, you must first work out if remortgaging will really get you a better deal.
6. Your property has increased in value
If you are in this fortunate situation where your home has increased in value since you move in, your LTV will drop. This will make you eligible for more cheaper deals that you may not have been eligible for when you first purchased the property.
7. Remortgage buy to let
Remortgaging can raise enough buy for people looking to invest in a buy to let or purchase a second home.
Remortgaging can allow you to release equity in your home that can pay the deposit need for purchasing a buy to let property (or possibly the purchase price).
However, it goes without saying that investing in a buy to let property is a major financial commitment. If you have to increase your total debt to do it, you should carefully plan it out. Further, there are some circumstances in which you should think twice about remortgaging.
If you are interest in Buy to Let, you can get more information in our guide to Buy to Let.
Barriers to remortgaging
Whether or not you should remortgage depends on your circumstances. Often it can save thousands of pounds when done right.
However, in some circumstances, remortgaging can have some serious disadvantages. Here is the list of the most common:
7.1. Small mortgage debt
Once your loan falls below a certain amount, it may simply be not worth remortgaging considering the costs involved. Further, some mortgage lenders will not even take on a mortgage that is below £25,000.
The smaller your debt is, the worse the remortgaging costs will affect you. Often, it is better to remain on the higher interest rate mortgage than switch to another product.
7.2. Early repayment charge
An early repayment charge can become a huge barrier to remortgaging, particularly if it is large. It will not make much sense to remortgage if the cost of freeing yourself from your current deal is much higher than the saving you may make if you remortgage.
7.3. Your property has dropped in value
The amount you will owe your lender will be based on the portion of the home you own outrightly. If your property drops in value, you can become a victim of negative equity (which can be dangerous for borrowers). Consider the following scenario to see how negative equity works:
You put down a 10% deposit when you got the mortgage, and the remaining 90% was covered by your mortgage. When your property price drops, your debt will increase and get higher than the property’s value.
The only thing you can then do is pray, make overpayments whenever possible, and wait for the prices to go back up.
7.4. You have very little equity in the property
If you are borrowing on a higher LTV ratio, you will be offered higher interest rates, so it may not be worth your while to remortgage.
A last few words about remortgaging
You should always speak to your existing mortgage lender about remortgaging. Your existing lender may be able to offer you the best deal.
However, that should not stop you from going back into the mortgage market and compare mortgage deals by other lenders.
Further, even if you are locked into a mortgage, you may have other options. If you speak to your mortgage lender, you might be able to remortgage your current lending over a longer term. This would make your monthly repayments lower (although in the long run, it would end up costing you more)
If you want to access some equity in your home but don’t want to switch to another mortgage provider because you are already being offered a great interest rate, you can extend your mortgage to arrange a larger loan as part of a remortgage.If you want to know why you might consider remortgaging, when you should remortgage, the cost of remortgaging and the steps on how to do it, then read on.