Remortgaging is the process of securing a new deal on your current mortgage with either your current or a new lender.
What is remortgaging?
If you already have a mortgage, switching to a new deal on your current property is called a remortgage. The new mortgage – this could be from the same or a new lender – is used to pay off your old mortgage.
Though you will have already gone through the mortgage process to secure your current one, remortgaging is not necessarily easier. You will still have to submit a lot of paperwork, pass strict affordability checks and most likely need to use a conveyancing service. Staying with the same lender may make the process slightly easier.
Why should I remortgage?
The simplest reason for remortgaging is that you want a better deal and by better, we mean cheaper: if you’re paying your lender’s standard variable rate (SVR) right now, switching to a fixed-rate mortgage could save you thousands of pounds.
The other common reason for remortgaging is to borrow additional money from the lender. You might use that money for home improvements to increase the value of your home, but you could use it for something else entirely.
When can I remortgage?
If you try to exit your mortgage during the special introductory promotion (i.e. a fixed-rate, a discounted-rate, or tracker mortgage), there will most likely be an early repayment charge (ERC). The ERC is usually calculated as a percentage of what you owe, so it could be tens of thousands of pounds.
When your promotional term ends, you’ll automatically revert onto the lender’s SVR, on which you will not normally need to pay an ERC. However, the rates will probably be a lot higher than the interest rate you previously enjoyed.
For this reason, it is perhaps worth trying to remortgage before your promotional term finishes. Mortgage offers usually last for between three to six months and can take a month or two to come through.
For more information, read our full guide on when to remortgage?
Should I remortgage?
The decision to remortgage ultimately rests on one main thing: will you save money with a new mortgage?
To work that out, you need to calculate what fees (if any) you will need to pay to exit your current mortgage and any fees for taking out a new one.
To leave your current mortgage, there will likely be a flat exit fee of £50 to £200, plus an early repayment charge if you’re still within the promotional period.
The new mortgage will usually have some fees attached too, including application/set-up fees, survey fees from the lender and solicitor fees.
Still, if you’re reducing your interest rate significantly – for example, from an SVR of 5% to a fixed-rate of 2.5% – then you’ll likely save thousands of pounds in the long run.
Read our in-depth guide on deciding whether or not you should remortgage
How much can you save by remortgaging?
If you remortgage to a new mortgage with a lower interest rate you could pay less money overall (or at least until the next time you remortgage), and your monthly repayments will be lower.
For example, if you currently owe £200,000 with an interest rate of 5% and 20 years left on your mortgage, you will pay a little over £79,200 over the next five years (£1,320 per month). But if you were to remortgage to a five-year fixed-rate mortgage at 2.5%, you would only pay £63,600 over the next five years (£1,060 per month): that’s a £15,600 saving over five years.
If you are remortgaging in order to borrow more money from the lender, do not forget that you’ll need to do your calculations on the new principal amount.
How to remortgage
- Check how much your property is worth. Use an online property portal like Zoopla, or ask an estate agent for a valuation.
- Find out how much you still owe your lender. You might be able to do this online or by looking at your latest statement. Otherwise, contact your lender and ask for a redemption statement.
- Decide on the type of mortgage you want. Do you want a fixed, discount or tracker mortgage? And will it be repayment or interest interest-only?
- Find a new mortgage deal by looking online or talking to a mortgage broker.
- Add up all the fees. Weigh up the costs of leaving your current deal with taking out a new one. Will you definitely be saving money?
- Make sure payments are affordable. Do not become house poor! This is when the majority of your income goes towards paying off your mortgage and other property maintenance costs leaving very little left over.
- Apply for the new mortgage and let your solicitor take care of the rest.
How long does a remortgage take?
Getting a remortgage usually takes between one to two months, though it can take longer if there are any complications, such as if your application is rejected.
If you get a new deal with your current lender, the remortgage process is likely to be faster than if you decide to change to a new lender, but it will still need to do a deep dive into your finances to be sure you can comfortably meet the payments.
In general, you should begin the remortgage process at least two months before your current promotional term ends. Most mortgage offers are valid for a few months.
Will I be able to remortgage?
It’s important to remember that remortgaging is just like taking out a new mortgage – the lender needs to be satisfied with your credit history and the affordability of the new mortgage. Your income and all your outgoings (including other lines of credit) will need to be assessed before your remortgage is approved.
Just like any type of credit, applying for a remortgage will appear on your credit record, whether you’re accepted or not. For the same reason, it is best to try and avoid applying for multiple remortgages at the same time – it can be expensive if there are up-front fees, and you could end up with a few hits on your credit record, which could further decrease the chance of being accepted for a remortgage.
How will remortgaging affect my home equity and loan-to-value ratio?
One of the most important factors when getting any mortgage is the the loan-to-value (LTV) ratio. If you’re buying a £300,000 home and you have a 10% deposit of £30,000, you will need to borrow £270,000, giving you a 90% LTV. As the LTV decreases – which it does in 5% increments: 85%, 80%, 75%, 70% and so on – lenders usually offer mortgages with lower interest rates.
A first-time buyer is unlikely to have a giant deposit. In fact, 95% LTV mortgages are particularly popular with first-time buyers. But even if you started with a 95% LTV, by the time you come to remortgage your home, the LTV could have dropped because you’ve repaid some of the principal debt thanks to your monthly repayments.
For example, if you’ve paid off £60,000 on your £270,000 mortgage, then you would only need to borrow £210,000 when you remortgage, giving you an LTV of 70%. You should be able to find a cheaper mortgage with a 70% LTV than with 90% LTV.
If you have positive equity in your home, you will not need a deposit for a remortgage but can use that equity in its place. Positive equity is essentially the profit you’d get if you sold the property and paid off the loan. If you’ve built up some savings, you could also add those funds to the new deal, thereby reducing your LTV even further.
However, if the value of your property has dropped below the mortgage itself, you will be in “negative equity”. In this instance, remortgaging to a cheaper deal will be nigh on impossible and you may be stuck on your lender’s SVR until the value of your property exceeds the mortgage, or you can overpay enough to reduce the mortgage amount until it is lower than the property value. If you are stuck on your current deal, you are what is known as a “mortgage prisoner”.
Now read our guide on what to do if you are a mortgage prisoner
Edited by: Sarah Guershon
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