REMORTGAGING

If you are considering remortgaging, make sure to contact our independent advisers who will consider all your circumstances as well as available deals before offering impartial advice about which remortgage options are right for you.

In today’s competitive market, many borrowers choose to remortgage (switch their current mortgage to a new lender) or undertake a product transfer (take a new deal from their existing lender) every few years in order to take advantage of the new rates and products on offer or to fit changing life circumstances. Both options should be considered several months before any existing deal finishes.

Remortgaging can help you…

Save money & avoid moving home

Remaining on the same deal for the full term of your loan could see you losing out on the opportunity to reduce the total amount paid back, in some cases leading to significant savings. It can be cheaper and more convenient to adapt or add an extension to your existing home, paid for by remortgaging or a further advance, than to move home.

Consolidate your debts 

Remortgaging can allow you to release some of the equity you hold in your home and consolidate other debts, such as a car loan or credit cards, which can attract higher rates of interest than that of your mortgage. While this could reduce monthly payments, it may mean you pay more over the long term, so should be carefully considered and professional financial advice sought.

Suit changing circumstances

If your financial situation has changed and you now need a mortgage that can accommodate, for example, higher overpayments or a lower monthly rate, remortgaging can get you a deal that better fits your lifestyle.

Switch from interest-only to repayment

Perhaps you’re on an interest-only mortgage and you want to move to a repayment mortgage. Generally speaking, your lender should be able to change this for you without the need to remortgage but if they can’t offer you the deal you want, then you might consider a full remortgage.

If you want to make overpayments

You might have a higher paying job now than you did when you took out your mortgage, meaning you now have more disposable income and can afford to make overpayments, but perhaps your current lender doesn’t allow you to. Therefore, you might want to look at changing over to a new mortgage with a lender who will allow you to make overpayments.

Raise money 

Higher income or a rise in your property’s value means you could increase your mortgage to help pay for major outgoings such as a wedding or your child’s university costs, rather than borrowing separately, and in some cases more expensively, from other sources.

But it’s not always easy to do so if…

You need a very small loan 

Many lenders accept remortgage applications only if the loan required is above a minimum level of about £25,000. Fees may also be a problem with very small remortgage loans, as these may outweigh the small saving on offer.

You need to borrow a high percentage of your property’s value 

In general, putting in a bigger down payment will give you access to better rates. If you own less than 5-10% of your property, you may find it difficult to access the more competitive rates.

You have high Early Repayment Charges 

If you have recently taken out a fixed rate mortgage or a discount mortgage you may find that early repayment charges make it very expensive for you to take your loan elsewhere in its first few years. In some cases these charges can outweigh the savings you’ll get from switching to the new mortgage. 

You’ve recently become self-employed 

Lenders need to feel sure you will be able to repay the loan you take on, so they need to know your likely future income. If you have recently changed your work status from employee to self-employed, but have not yet had time to build up a reasonable track record for your business, you may find it difficult to get a good remortgage deal.

What is equity?

 

Equity is a term that refers to how much of the property you own outright. So if you bought a property with a 10% deposit, then you would own 10% equity in the property.

Usually, the level of equity you own in the property will go up as you repay the mortgage, since the outstanding debt will represent a smaller proportion of the overall value of the property.

While you might have taken a mortgage at 90% loan-to-value when buying the property, a year later that may have fallen to 88%, meaning the equity you own has increased from 10% to 12%. 

However, that’s not the only way that the equity you own can increase – it will also go up if the property increases in value.

How does remortgaging to release equity work?

Let’s say that you bought a property for £250,000 with a £200,000 mortgage five years ago.

In that time the mortgage you owe has fallen to £180,000, while the value of the property has increased to £300,000.

As a result, the equity you own in the property has increased from £50,000 at the time of purchase to £120,000.

If you just wanted to remortgage to a cheaper mortgage rate, then you would look to borrow £180,000

This works out at a loan-to-value (LTV – how the size of the loan compares to the value of the property) of 60%. That’s a significant improvement from the 80% LTV you borrowed at initially.

This is important, as the lower the LTV, the lower the interest rates mortgage lenders offer, meaning cheaper repayments.
However, you could remortgage for a larger amount than you actually owe, thereby releasing some of that equity to spend elsewhere.

For example, you could instead remortgage for £200,000. That would put the loan to value at 66%.

You’d still be borrowing at a lower LTV than when you first bought, likely meaning a lower interest rate, but you also have £20,000 to spend however you like.

How much equity do I need?

Ideally, releasing cash by remortgaging is only something you should do if you have a significant amount of equity built up in the property, to the point that increasing your equity will not dramatically change the loan-to-value of the mortgage.

Interest rates are typically priced in 5% bands of equity, getting lower and lower the more equity you own.

So, a 90% LTV mortgage will be cheaper than a 95% mortgage, and an 80% LTV mortgage will be cheaper than an 85% deal, and so on. 

Lenders reserve their best deals for borrowers taking out mortgages at a lower loan-to-value, typically in the 60% to 65% range.

If the size of your mortgage increases when you release cash, from being around 60% loan-to-value to 75%, you will almost certainly have to pay a higher rate of interest.

 

Should I remortgage to pay off debts?

Mortgages tend to offer lower interest rates than a personal loan, and are much cheaper than credit cards.

Adding debts to a mortgage will allow you to spread repayment over the term of your deal – potentially decades, compared to the five or 10 years with a loan, or two years with a 0% balance transfer credit card.

However, think carefully before you do this. As you’re extending your repayment period, you’ll be paying much more interest over the long term.

Say you have debts of £20,000 you want to clear by releasing cash from your property. You currently have £180,000 left on your mortgage with 20 years to go, and you’re paying 3% interest. Your house is worth £300,000.

By increasing your mortgage to £200,000, your monthly repayments will go up by £111. You’ll end up paying £6,600 in additional interest. 

If you borrowed the same amount on a personal loan, charging a higher interest rate of 8%, but repaid over five years, you’d pay £4,170 in interest. 

It makes sense to look at all the alternative ways to reduce your debts before considering remortgaging to pay off debts. 

The pros and cons of remortgaging to release equity

The big positive of releasing equity like this is that you unlock some money which you can put to use, whether it’s to consolidate other debts, pay for home improvements or to gift to a family member.

But remember – you are increasing the size of your loan. This is not something you should do lightly. Depending on the mortgage you go for, this may mean that your monthly payments actually go up.

Remember that house prices can go down as well as up. If house prices fall sharply, that equity you have built up could quickly be lost, potentially even leaving you in negative equity. This is when your outstanding loan is larger than the value of the property.

Being in negative equity can make it extremely difficult to remortgage or move home in the future.

Early repayment charges

You could face significant exit fees for moving from your current mortgage to the new loan. If you remortgage during the initial fixed or tracker period of your mortgage, then you will likely need to pay an early repayment charge (ERC).

An ERC is generally calculated as a percentage of the outstanding loan and so can be a significant outlay. For example, a 5% ERC on a £200,000 mortgage works out at a £10,000 penalty charge, which would erode some of the equity you could release by remortgaging.

An ERC will not usually be charged once you have finished this initial period and moved onto your lender’s standard variable rate.

Other fees


In addition to the ERC, you will often have to pay an exit fee to cover the administration of closing your account. This is much smaller, usually around £100.
There will likely also be fees to consider.

Many mortgages charge a product or arrangement fee just to get the loan, which will typically cost around £1,000 (though some fee-free products are available).
You can add this to the mortgage balance, though doing so will mean you pay interest on the fee, costing you far more overall.

There may also be fees associated with the legal side of the remortgage, though many lenders promise to cover these fees as part of their offer.