If you have a mortgage on your home, there may come a time when you want to remortgage. There can be lots of different reasons for doing this. Maybe you’re coming to the end of your current deal and want better terms, or perhaps your circumstances have changed since you first took out your mortgage?
Remortgaging is a big decision and requires lots of thought before going ahead. For some, it can be a great move that can save you a significant amount of money, but it’s also not suitable for everyone.
In this guide, we’ll look at the pros and cons of remortgaging and provide an overview of how the process works. So you can consider every angle to decide whether it’s the best option for you.
What does remortgage mean?
First of all, let’s look at what remortgaging actually means. A remortgage is essentially a new mortgage on a property you already own. You don’t have to move or buy a new property to remortgage – you’re simply switching to a new mortgage deal.
The most common reason to do this is to save money. Still, in certain circumstances, you may also be able to borrow more against your existing home by releasing equity. We’ll explain more about this below.
You can remortgage with your current provider, known as a product transfer, or switch to a new lender. Either way, if you have a mortgage on your home, you’ll likely have the opportunity to remortgage at some point. It’s estimated that about a third of all mortgages in the UK are remortgages. Whether it’s the right decision for you is another question and one that’s best answered after weighing up the reasons for and against remortgaging.
Reasons for remortgaging
As we mentioned above, the most common reason for remortgaging is to save money. Your mortgage is likely to be your single most significant expense, and you could potentially save hundreds of pounds a month by changing your mortgage deal.
Saving money isn’t the only reason for remortgaging, however. Let’s take a look at some other reasons below:
Your current deal is coming to an end – you might be moved to a more costly standard variable rate (SVR) repayment plan. More on this below
You want to switch from an interest-only mortgage to a repayment option – if you’ve only been paying the interest on your mortgage but now want to start paying off the loan
The value of your home has increased
You want to borrow more – by releasing equity in your home
Economic uncertainty – if you’re worried about the economy and interest rates, you might want to move to a fixed-rate mortgage for more security
You want to pay off your mortgage earlier – your current mortgage might not let you pay it off early without incurring penalties
A more flexible mortgage – if your circumstances have changed, switching deals or moving provider could offer benefits like mortgage holidays and greater flexibility
Saving money remains the most significant reason people remortgage. While several of the factors above can save money, the primary motivator is to reduce your monthly mortgage payment, which could be your largest outgoing. This can be achieved more quickly than you might think.
For example, if your current deal is about to end, the fixed interest rates that brought you to that lender might also be about to expire. Soon, you’ll be moved onto a standard variable rate mortgage. Remortgaging would allow you to avoid this and potentially secure an even better fixed-rate elsewhere.
Research shows that 27% of homeowners are on an SVR and paying an average of £4,000 more than they need to each year.
Reasons not to remortgage
While remortgaging can feel like a no-brainer when it comes to saving money, it’s not the right move for some people. To understand why let’s take a look at the main reasons not to remortgage:
There is a large Early Repayment Charge (ERC) on your mortgage
Your financial situation has changed for the worse – perhaps you’ve changed jobs and have less money coming in, or you’ve missed payments, and your credit score has suffered
The value of your property has fallen – if you owe more money than your property is worth, you might struggle to remortgage
You have little or no equity in your home
Your current mortgage is still competitive – while it might be worth seeing what’s out there, you might already be on an excellent deal
Small mortgage debt – if your debt is low, you’re less likely to make a saving, and some lenders won’t take on mortgages below £25,000
While remortgaging to release equity can seem like a great idea to get yourself out of financial trouble or afford a one-off purchase like a renovation or holiday, you’re essentially taking on more debt.
If your financial situation has worsened since you initially took out your mortgage, it could make matters worse. There’s also the possibility that you might not get a better mortgage deal than you’re currently on, especially if you now have less-than-perfect credit.
The added cost of fees and charges for remortgaging could also cancel out the benefit of switching, so it’s a good idea to work out the total cost. We’ll have more on this below.
Remortgaging can be a smart move to save money. Those with a good credit history, stable financial circumstances, and a property that has maintained or even gained value are the ones who stand to benefit.
Remortgaging fees
One of the main reasons not to remortgage is to avoid charges and fees. The main one to watch out for is the Early Repayment Charge (ERC) – this is payable if you leave your mortgage deal before it finishes and can amount to thousands of pounds.
You should also watch out for expensive set-up fees, which could cancel out the financial benefit of getting a new, low fixed-rate offer.
It’s essential to do your homework to work out the total costs of remortgaging, including fees over a set period.
Why can’t I remortgage?
There are also situations where the reasons for and against remortgaging don’t matter because you simply can’t make the change.
Negative equity
One reason for this might be negative equity. This is where the value of your property has dipped below your outstanding mortgage debt. Even if your current deal is coming to an end, most lenders won’t let you change mortgages if you now owe more than the property is worth.
As a result, you could end up on an SVR until the property goes up in value. One potential solution would be to overpay your mortgage and remortgage to a cheaper deal as soon as you’re out of negative equity.
Your financial circumstances have changed
You might not be able to remortgage if your financial circumstances have worsened dramatically and you now have bad debt. In this situation, you may not be approved for a remortgage (or new mortgage), as you wouldn’t pass the credit checks.
I own my house outright. Can I remortgage?
Suppose you’ve paid off your mortgage, inherited a property, or bought your house outright without a loan. In that case, this is known as an unencumbered mortgage. In this context, unencumbered simply means your home is mortgage-free. As such, you can’t remortgage, but you can take out a new mortgage on the property, and you may be able to get an excellent deal.
Your application will be treated like any other; your employment status, age, credit history, and additional information will be considered.
There can be many reasons for remortgaging (or taking out a new mortgage on) a property you own outright. For instance, this would allow you to release some capital without having to sell the house in the case of inherited property.
Can you remortgage with the same lender?
Can you remortgage with the same lender? Yes, but this might not always result in the best deal.
You might think that sticking with your current lender would be rewarded with lower rates and better terms. Still, in the majority of cases, you might get the best deal by shopping around. It really depends on what your priorities are.
Remortgaging with the same lender has advantages, saving you the trouble of going through an entire application process with a new lender. But with the mortgage market so competitive, you could be missing out on a better deal elsewhere.
Mortgage product transfers
A product transfer is a remortgage with your existing provider. In 2018, nearly 1.2 million homeowners chose a product transfer – more than double the figure that chose to remortgage with a new lender. There is no guarantee of better rates, but there are some benefits to this approach.
For instance, since a product transfer is just changing the terms of your current deal, it can be a swift and straightforward process and could have lower fees. Additionally, suppose you’re not asking to borrow more. In that case, you may not have to go through affordability and earnings checks to the same level of scrutiny as if you were applying to a new lender.
While you might not get a better deal, it doesn’t hurt to see what your existing provider is willing to offer. Most lenders also have offers available for product transfers that they don’t advertise to entice borrowers thinking of leaving. In any case, it’s worth looking into before going elsewhere.
Ready to remortgage?
Before you go ahead with your plans to remortgage, do your research and plan your next steps to put yourself in a position for the best possible deals. From performing a credit health check to getting your finances in order and finding out your property’s value, there’s lots of preparation to do. Here are a few tips:
Start early – you should start looking for a new mortgage around 3 to 6 months before the end of your current mortgage deal
Shop around – but try not to apply to more than 3 lenders in total, as future lenders can see this, and it could affect your credit score
Check your credit score – you should have a clear picture of your current financial situation before your mortgage provider does to avoid any surprises
Get a property valuation – while your lender will get their own independent assessment done, it’s helpful to know your property’s current value from the outset
Work out your loan to value (LTV) ratio – this is the ratio between how much you need to borrow and how much your property is worth
Speak to your existing mortgage provider to enquire about product transfer deals – it’s also worth speaking to your bank, as many offer mortgages
Consider working with a mortgage broker
Alongside these top tips, there are also things you should avoid while planning to remortgage. For example, it’s recommended that you:
Do not apply for a credit card before remortgaging – this could damage your credit score
Stay out of your overdraft
Avoid excess spending – for 3 or more months before you apply
How to get the best remortgage deals
This is very similar to comparing mortgages in the first instance. You can either go it alone to find your own deal or work with a financial advisor or mortgage broker to help you find the best product. Either way, it’s about shopping around, comparing rates and features, and weighing up the best option for your particular circumstances.
A whole-of-market mortgage broker has the advantage of being able to compare almost all of the mortgages available and find the one that is best for your financial situation. What’s more, brokers often have access to special mortgage deals with lenders that are unavailable to borrowers.
Regardless of how you go about it, certain factors can make a big difference to the deal you’re offered.
Remortgaging and loan-to-value
The loan-to-value (LTV) ratio is critical when it comes to remortgaging. As we explained above, LTV is the ratio between how much you need to borrow and how much your property is worth.
Your LTV ratio is the single most crucial factor in deciding what interest rates a mortgage lender will offer. This means it plays a big part in getting the best remortgage deal.
Just like a larger deposit gives you access to better mortgage rates on your first home, a lower LTV means lower interest rates when remortgaging. The lower your LTV, the better the remortgage deal you’ll be able to get.
Your LTV can end up getting lower for a few reasons, usually because you’ve been paying off your mortgage, and your property has increased. It can also happen if your property’s value has risen since you first took out the mortgage. If this is the case with your home, it could be another reason to remortgage.
A final note
Whether it’s to save money with a better deal or release equity in your home and borrow more, there are many reasons for wanting to remortgage. While remortgaging could save you money, it’s not suitable for everyone, so you need to take a long look at your circumstances before going ahead. Thankfully, now you know everything you need to get started.