Should I remortgage?

Remortgaging is the process of getting a new mortgage on your existing property either with your current or a new lender. More often than not, the main reason to remortgage is to save yourself some money, but it’s not the only one.

Why should I remortgage?

1. Your current deal is about to end or has already ended

When you first applied for a mortgage, you will probably have gone for one offering some kind of discount: a 2-year fixed rate or a 3-year discounted variable rate, for instance. Once that initial offer ends, you’ll be automatically put on to your lender’s standard variable rate (SVR), which will almost certainly come with a higher rate.

It's been estimated that about a third of all mortgage borrowers are on a lapsed SVR product, meaning they are paying more than if they remortgaged.

Speak to your current lender to see if they can offer you a new mortgage with a cheaper rate, shop around with other lenders and speak to brokers to ensure you get the best deal possible.

Most mortgage offers last for three to six months, which is why you can search for a new mortgage and lock in a new rate before your current promotional period ends without incurring a fee.

You may want to remortgage even if your deal is not ending any time soon. But check if there is an early repayment charge (ERC) and if it’s still worth your while switching to a loan with a lower rate.

2. To save money

Remaining on an SVR mortgage could cost you thousands of pounds more than if you were to switch to a new deal when your introductory offer ends. With rates as they are, that’s even true if you consider set-up or arrangement fees, which can cost up to £2,000.

Speak to your current lender to see if they can offer you a new mortgage with a cheaper rate, shop around with other lenders and speak to brokers to ensure you get the best deal possible and help you save the most money.

3. To release some of the equity in your home

Equity is the stake of your property you own outright. So, if you put down a 10% deposit on a house (and got a 90% LTV mortgage), you own 10% of the property – the lender owns the rest.

As you start to pay off the mortgage, a larger share of the house becomes your equity. And if the value of your property has increased since you bought it, that will give you further equity. So remortgaging releases some of that equity as cash.

For example: you bought a £200,000 house in 2017 with a £180,000 two-year fixed rate mortgage. Through your repayments over the course of two years, you’ve paid off £10,000 of that debt and now owe the lender £170,000. In the meantime, the value of your property has increased to £250,000. This means you have £80,000 to reinvest in your property when you come to remortgage giving you around 30% equity and access to a range of 70% LTV mortgages (which will have better rates than the 90% mortgage you were on previously).

However, you don’t have to reinvest the full amount back into the mortgage. You may in fact decide to take that additional cash and use it to renovate or extend the property. Lenders allow you to do this because you’ll be increasing the value of their investment.

4. To pay off your mortgage earlier

Paying off your mortgage early means you’ll own your home sooner. If you want to pay it off sooner but your current deal restricts how much you can overpay each month, remortgaging might be the answer for you.

You’ll probably end up with larger monthly payments but you’ll save money over the long term as the loan capital will be being paid back faster.

5. The value of your property has increased significantly

If you’re very lucky, your property may have drastically increased in value since you first bought it. As a result, when you come to remortgage, you’ll be able to channel a lot more equity into the mortgage, thus hugely lowering your LTV and lowering your monthly repayments.

Using the above example, the £200,000 property you bought with a £20,000 deposit got you a two-year fixed rate (at 1.69%) mortgage with 90% LTV over a 25-year term. Your monthly repayments equate to £787 per month. Since then, your property has been valued at £350,000 – and thanks to your repayments, you’ve paid off a further £10,000 and owe the lender £170,000. Add this to the extra £150,000 the property is now worth and you’ll have £180,000 to put towards the property when you remortgage.

You should now be able to get at least a 50% LTV mortgage over a 23-year term, meaning your rate could drop to 1.39% and your monthly repayments to £720. Though these rate and repayment drops are not huge, your equity in the property has jumped to 50% – you now own 50% of a property worth £300,000 rather than 10% of a property worth just £200,000.

6. You want to switch from an interest-only to a repayment mortgage

Interest-only mortgages are not nearly as popular – nor as easy to get – as they were before the global financial crisis in 2008.

Although interest-only mortgages allow for far lower monthly payments than traditional repayment mortgages (where you pay off the mortgage as well as the interest on the loan), the mortgage debt never goes down.

Consequently, when your mortgage term is up, you’ll still owe the lender the full mortgage balance. More often than not, this is paid off by selling the property, but if you do not want to sell, you’re left with a huge amount of debt to pay off and, potentially, no way to pay it.

7. Economic uncertainty

The global economy has been shaken by the coronavirus pandemic and there’s widespread expectation that it is going to take a long time for economic stability to return. Add the unknowns of Brexit to the equation, and it seems unlikely that interest rates will be on the rise for some time.

However, no one can ever be absolutely certain over such things so there’s always the chance that the cost of borrowing will increase sooner than expected.

If it gets to the point where you think interest rate rises are around the corner, remortgaging on a low fixed rate might save you a lot of money over the following years.

17th June 2020