Guide to remortgaging
What is remortgaging?
When buying a home, most people get a mortgage.
However, you should not view this as a one-time purchase but as an ongoing financial arrangement that needs regular attention.
The terms of the mortgage deal you are offered may only stay in place for a few years, after which they may change. This can result in higher monthly repayments.
To ensure that you can still afford these repayments, and also keep them as low as possible, you will probably need to find a new mortgage deal every few years. This is called remortgaging.
Reasons to remortgage
Although a full mortgage term is usually around 20 to 25 years, a typical mortgage deal will last between two and five years, although some lenders offer 10-year deals.
You may, therefore, have several different mortgage deals over the lifespan of your mortgage.
When your mortgage deal ends, the interest rate will change to the lender’s standard variable rate (SVR).
This will usually be higher than your previous rate, and even if it isn’t, it may rise unpredictably.
Here are some reasons why you might want to remortgage:
- Your current deal is about to expire, which would push you onto the lender’s SVR.
- Your circumstances have improved, so you might get a better deal.
- Your home's value has risen significantly, so you could get a more competitive deal.
- You want to switch to a different kind of mortgage, such as a fixed, capped or tracker.
- You need a more flexible mortgage, such as one that allows you to miss payments or make excess payments, which is useful if your income fluctuates.
- You want to borrow money against your property.
What are the costs of remortgaging?
The potential cost of remortgaging will depend on many factors, including the terms of your current mortgage and the deal offered by your lender.
Similar to taking out a mortgage for the first time, you will find some mortgage deals have hefty arrangement fees attached, while others may have fewer upfront costs.
A major charge to watch out for is the early repayment fee (also known as a redemption penalty) on your current mortgage.
This is not the same as an exit fee, which is usually small and may be up to 5% of the mortgage value. A large redemption penalty may make the process too costly or not worthwhile.
This is why, whenever you take out a mortgage, you should always think ahead to your next one. It is best to find a mortgage broker who will study the terms of any mortgage deal you’re offered.
Remember, a redemption penalty may apply beyond the terms of your mortgage deal.
For instance, a mortgage might have a two-year fixed rate deal, but charge a penalty if you leave before three years are up.
Such arrangements are easy to miss and can force you to spend one or more years on your lender’s SVR, which may be very costly.
If you are buying your next home and want to avoid early repayment fees, you may have the option of porting your current mortgage.
Is remortgaging right for me?
Even if your deal is about to expire, there may still be good reasons to stick with your current mortgage.
For example:
- Your outstanding loan is small (e.g. £50,000 or less)
The switching fees may cancel out any potential savings.
- Your current mortgage has a large redemption penalty
A large early repayment fee may make it cheaper to keep your current mortgage. However, your current lender may let to change to another of its own deals at a reduced charge.
- You have a high loan-to-value ratio
If your equity is low (for example, if you have a 90% mortgage), you’ll struggle to get a better deal elsewhere.
- Your circumstances have deteriorated
Were you offered your current mortgage based on you (and/or your partner) having a higher or more reliable income than you have now? If so, you might not get a better offer, although it’s still worth trying.
- You can borrow money more cheaply elsewhere
Although it’s possible to borrow money against your property, it’s rarely the best solution. You'll likely be charged more interest even if it's at a lower rate as it's over a longer term compared to a higher rate over a short amount of time.
If you think any of these issues may apply to you, talk them over with a mortgage broker.
How to remortgage
The best way to decide about remortgaging is to ask an independent mortgage adviser or, alternatively, an independent financial adviser (IFA) who specialises in mortgages.
A mortgage broker can assess your current deal, take your financial circumstances into account and find you the best deal from the whole market.
They can also alert you to any lock-ins or unfavourable aspects of the deal so you don’t get caught out further down the line.
Making the right choice at the right time can potentially save you thousands of pounds over your mortgage term.
To learn more about the remortgaging process and what it involves, check out our step-by-step guide to remortgaging or contact a mortgage broker who will help you find the best remortgage deal.
If you found this article helpful, you might also find our article on remortgaging on help to buy informative too.
