Guide to remortgaging
Remortgaging means replacing your current mortgage deal with a new one, which could reduce your monthly repayments or release equity from your property.
It may involve changing mortgage lender, or it may simply be a case of switching mortgage deals with your existing lender. Many buyers take out a fixed rate mortgage deal to begin with, and then switch when their fixed period has ended.
Most lenders offer a selection of exclusive remortgage-only deals to existing homeowners. These deals may involve 'free' legal work and valuations, although be sure to weigh these benefits against any product fees, and take all fees into account when you're comparing the cost against your current mortgage deal. A lower interest rate alone may not mean a cheaper mortgage.
Should you remortgage?
The main reason many choose to remortgage is to save money. Here are a few reasons why you might want to remortgage:
- Your initial deal is coming to an end. Most fixed rate, tracker or discount mortgage deals only last for between two to five years. When this comes to an end, your lender moves you on to their standard variable rate (SVR) which is usually higher than fixed term deals. Start looking around 15 weeks before your deal ends.
- You'd like a lower interest rate. Although you may face early repayment charges for leaving your deal before the end of its initial period (usually between 2 and 5 years), it could still be cheaper to swap deals, particularly if you have a sizeable mortgage loan. There's usually also an exit fee, so make sure you work out all the costs involved.
- You're unable to overpay under your current deal. If your circumstances have changed and you want to clear your mortgage faster but your current lender won't allow overpayments, you could remortgage. A remortgage could allow you to reduce the size of your mortgage and get a cheaper rate, although you may be charged early repayment and exit fees.
- You want to borrow more. If your lender has turned you down for increasing your loan, or they've offered you unfavourable terms, remortgaging to a new lender could help. However, fees and charges usually apply so it's worth calculating the true cost of deals against other forms of borrowing.
There are other reasons: if the value of your home has risen substantially and you want a better deal, for instance. It may just be that your needs have changed and you're now tempted by an offset mortgage, or you want greater flexibility over payments.
In contrast, there are reasons why remortgaging may not make sense. If your mortgage loan is small, the fees and charges may mean that remortgaging isn't cost effective. Similarly, if your lender charges high early repayment and exit fees, you may lose the benefit of moving to a lower rate. If the value of your home has dropped or you're in negative equity, you might not be able to remortgage.
How much can you borrow when remortgaging?
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In theory, having already been accepted for a mortgage once should boost your chances of getting a good deal the second time. However, depending on your circumstances, it could be more complicated.
The key question is how much equity you now own in your property. If you took out an 80% LTV mortgage originally and have been making repayments for several years, you should now find that you own a higher proportion of your property. If, for example, you now own 25% of the equity instead of 20%, you will now only need to borrow 75% of the property's value instead of 80%. This could mean that you can get a better deal.
However, if the value of the property has fallen significantly since you bought it, you could lose out. It can be a good idea to get your property valued before you think about remortgaging.
New mortgage affordability checks
If it's been a few years since you first took out your mortgage, you may not be familiar with the results of the Mortgage Market Review (MMR), which came into force in April 2014. The new rules mean that lenders must now carry out much more thorough affordability checks before they will lend to you. Be prepared for lenders to examine your finances in detail, scrutinising your income, outgoings and financial commitments.
Perhaps most importantly, lenders will now have to carry out a 'stress test', to make sure you could cope with a rise in interest rates. There is no given threshold in the new rules, so it's up to the lender to decide what level of interest they want to test you for. For example, if a lender decides to set their stress test at 7% interest and you couldn't afford repayments at that level, you could be turned down for a remortgage.
How much will remortgaging cost?
Before you take out a new mortgage, you should make sure that the fees charged won't outweigh the benefits of switching to a new deal. Fees will vary between lenders, but here's an idea of some costs you're likely to face:
- Arrangement fee: this is usually the most significant cost, and is often around £2,000. Be wary of percentage fees; on a £200,000 mortgage a 2% fee would be £4,000
- Booking fee: some lenders charge a fee to secure a particular deal. This is usually around £100 to £200 and is always non-refundable
- Valuation fee: these are usually free with a remortgage deal, but if not they usually cost about £250
- Legal fees: again, these are usually included in a remortgage deal
Some of these costs, such as a booking fee, will only be payable upfront. You will usually have the option to either pay the arrangement fee up front or add it onto the cost of your mortgage. If you can afford to, it's usually a good idea to pay the fees upfront; adding them to your mortgage will mean you pay more in the long run as they will accrue interest.
To work out whether remortgaging is worth it:
- Add up the total cost of sticking with your current deal. If your fixed or tracker rate is about to expire, use the SVR for your calculations. Multiply your monthly payments by the number of months the deal is likely to last to get a total figure.
- Next, add up the total cost of the new mortgage deal. Again, multiply the monthly payments by the number of months the deal will last, and add on all the other fees and costs.
- Compare the two figures to find out which will be cheaper overall.
Last updated: 30 May 2015