Remortgaging your home could save you thousands of pounds by switching to a better deal with a lower interest rate and fewer fees.
What is a home remortgage?
If you already have a mortgage, switching to a new deal is called a remortgage. The new mortgage, which might be from the same lender or a new lender, is used to pay off your old mortgage.
Why get a remortgage?
The simplest reason for remortgaging is that you want a better deal: 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 over the next few years.
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, or for something else entirely.
When can you get a remortgage?
If your current mortgage has a special introductory period (i.e. a fixed mortgage, a discount mortgage, or tracker mortgage), there will usually be an early repayment charge if you remortgage before the end of the special period – usually between two and 10 years. The early repayment charge could be tens of thousands of pounds.
When your promotional term ends, however, you’ll usually be placed on the lender’s standard variable rate (SVR), which will probably be a lot higher than the interest rate you previously enjoyed. This is when you might want to remortgage – either to secure a lower, fixed rate of interest, or perhaps to raise more funds for home improvements.
Should you remortgage?
Remortgaging is a fairly straightforward calculation: will you save money with the 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 mortgage.
To exit your current mortgage, there will likely be a flat fee of £50 to £200, plus an early repayment fee if you’re still within the promotional period. That fee is usually a percentage of how much you still owe, so it could be thousands of pounds.
The new mortgage will usually have some fees attached, too, including an application fee and survey fee from the lender, plus solicitor fees for searches.
Still, if you’re reducing your interest rate significantly – for example from an SVR of 5% to a fixed 2.5% – then you’ll likely save thousands of pounds in the long run.
How much can you save with a remortgage?
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 £79,200 over the next five years (£1,320 per month). If you remortgage to a five-year fixed rate mortgage at 2.5%, you will pay £63,600 over the next five years (£1,060 per month).
If you are using a remortgage to borrow more money from the lender, don’t forget that you need to do these calculations on the new principal amount.
How to get a remortgage
- Check how much your property is worth. Use an online calculator to get a rough guide, or ask an estate agent for a valuation.
- Find out how much you still owe your lender. This might be available online or on your latest statement. Otherwise, you can contact your lender and ask for a redemption statement.
- Decide on a type of mortgage: fixed, discount, tracker, capped – and will it be a repayment mortgage, or interest-only?
- Find a new mortgage deal by looking online or talking to a mortgage broker.
- Add up all the fees for exiting your old mortgage and taking out a new mortgage. Will you still be saving money?
- If you’re remortgaging to borrow more money from the bank, make sure the monthly repayments are still affordable; don’t be house poor!
- 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 a month and two months, though it can take longer if there are any complications, such as an application being 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 bank or building society.
In general, if you want a new fixed or discount rate mortgage to begin as soon as your current promotional term ends, you should start the remortgage process at least two months before. Most mortgage-in-principle offers are valid for a few months.
Will you be accepted for a remortgage?
It’s important to remember that remortgaging is just like taking out a new mortgage – the lender still needs to be satisfied with your credit record and the affordability of the new mortgage. Your income and current financial situation (including other lines of credit) will probably 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 usually isn’t a good idea to apply 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 dings on your credit record.
How does a remortgage affect your home equity and LTV?
One of the most important factors when getting any mortgage is the LTV – the loan-to-value ratio. If you’re buying a £300,000 home and you have a deposit of £30,000, you need to borrow £270,00 with a LTV of 90%. As the LTV goes down – to 85%, 80%, 70%, 60%… – lenders usually offer you better mortgages with lower interest rates.
A first-time buyer is unlikely to have a giant deposit – but by the time you remortgage your home the LTV could be much lower because you’ve repaid some of the principal debt. If you’ve paid off £60,000, then you would need to borrow just £210,000 with the remortgage – an LTV of 70%. You should be able to find a better mortgage with a 70% LTV than with 90% LTV.
If you have positive equity in your home, you don’t need a deposit for a remortgage. If you’ve built up some savings, though, you can add those funds to the new deal, reducing your LTV further.
And of course, if the value of your home has gone up, your LTV would be even lower – but the inverse is also true, if house prices have gone down!
Now read our guide to short-term borrowing