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08/12/20

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Landlord

Everything you need to know about remortgaging

You’ve probably heard the term ‘remortgage’.

But what does it mean, how does it work and could remortgaging save you money?

We’ve got all the answers right here…

What does remortgage mean?

Essentially, remortgaging sees you switch from one mortgage to another, either with the same lender, or a new one.

You don’t move to a new house and your mortgage is still secured against your existing property, but your new mortgage pays off your old one.

How does remortgaging work?

When you remortgage, a new loan replaces your old one.

To remortgage, you will have to go through your chosen lender’s affordability tests in the same way you would if you were taking out a mortgage when buying a property.

Reasons people remortgage

There are many reasons why you might want to consider a remortgage, including:

Your current mortgage deal is coming to an end and you don’t want to go on your lender’s Standard Variable Rate (SVR)
You want to reduce your interest rate to lower your monthly payments
To release equity from your home
Changing to a different type of mortgage product, for instance a fixed rate, to help with budgeting
You want to overpay your mortgage and your current mortgage terms won’t let you

Can remortgaging save money?

Remortgaging can sometimes save you money, but it’s important to factor in costs over the short and long term, the type of mortgage you currently have and the terms of that mortgage.

Changing your mortgage product

If you’re on a discount or tracker mortgage, your monthly repayments will be directly affected by changes to the Bank of England’s (BOE) base rate.

So, if the BOE base rate goes up, your monthly repayments will go up, too.

If the base rate looks like it’s going to rise, it could be cheaper for you to switch to a fixed rate mortgage.

But if you switch to a fixed rate and interest rates fall, you could find yourself paying more than you would have on a tracker or discount rate deal.

Remortgaging – things to consider

The value of your home – if your home has grown in value, you’ll have a lower loan to value (LTV) on your remortgage, so could enjoy a better interest rate
By switching to another lender, you could secure a better rate, so shop around
Factor in fees – while the interest rate you’ll pay is important, you should also consider any fees you’ll incur through remortgaging

How much are remortgaging fees?

Fees are a hugely important factor to consider when you remortgage.

If you’re facing a large number of high fees to remortgage, even a lower interest rate might not actually save you money in the long term.

The fees you may have to pay when remortgaging include:

Early repayment charges

If you’re tied into a mortgage deal, you could be penalised for paying off the loan early through a remortgage.

Early repayment charges are often a percentage of the amount of outstanding debt, so can be substantial amounts if your mortgage is large.

Once you factor in a large early repayment charge, you’d need to secure your new mortgage on a vastly reduced interest rate to make it worthwhile.

By remortgaging once your deal comes to an end, you’ll face no early repayment charge, so it could be more cost-effective to wait.

Mortgage fees

Even though you’re not moving to a new house when you remortgage, there are still a number of fees you could have to pay to get your new mortgage in place:

Mortgage arrangement fee – most lenders charge this fee on their various mortgage products. It can either be paid up front or added to your mortgage, in which case you’ll pay interest on it over the term of your loan
Valuation fee – while many remortgage products offer a free valuation, some don’t. Your property will need to be valued for the lender’s security and this could cost up to £300 if not offered for free by your lender
Conveyancing fee – your solicitor will charge a fee for conveyancing if you switch to a new lender, as their legal interest will need to be registered against your property. Some lenders offer free legal services for remortgages, so shop around

How long does a remortgage take?

Remortgaging is much quicker than buying a property but can still take between four and eight weeks – sometimes longer if there are delays to the process.

Do I need a solicitor to remortgage?

If you’re remortgaging with your existing lender, you won’t need a solicitor as there are no new legal charges to add to your home.

However, if you’re switching to a new lender, you will need a conveyancer or solicitor to do the legal work.

Many lenders offer legal work as part of the remortgage process, but be sure to check there aren’t costs involved, as it could be cheaper for you to appoint your own solicitor.

How much can I borrow when remortgaging?

How much you can borrow when remortgaging depends on your personal circumstances and the value of your property – just as it does when you apply for a mortgage to buy a home.

Your lender will assess your finances so they can be sure you’re able to repay your mortgage comfortably.

The lender will also value your property against the amount you wish to borrow – this provides a loan-to-value (LTV) percentage and the lower the percentage, the lower the interest rate you’ll have to pay in most cases.

How does remortgaging to release equity work?

If the value of your home has increased, you’ve paid down your mortgage over a number of years, or both of those scenarios are true, you’ll have equity in your home.

Equity is the difference between the value of your home and mortgage outstanding on it.

So, if your home is worth £500,000 and you have a mortgage of £350,000 secured on it, you’ll have £150,000 in equity.

Usually, the way to access that equity is by selling your home, paying off your remaining mortgage and banking the remaining money after fees, etc.

However, it is sometimes possible to release your equity through remortgaging.

This is known as ‘borrowing against equity’.

For example:

Your home has increased in value from £400,000 when you purchased it to £500,000 now, and your outstanding mortgage is £300,000
That means you have £200,000 in equity against that new value
If you remortgaged for £320,000 against the property’s new value of £500,000, that would leave you with a £20,000 lump sum once your old mortgage was paid off and before any fees
Your old mortgage LTV against the property’s old value when you bought it would have been 75%
Your new mortgage LTV against the property’s new value is 64%

That decrease in LTV could mean you will be paying a lower rate of interest on your new mortgage, although you will have less equity in your home having released £20,000 of it and your monthly payments could increase due to the higher amount you have borrowed.

Your lender will carry out strict affordability tests and assessments, so they can be certain you’re able to repay the new amount you wish to borrow.