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.
When applying for a mortgage, you will have most likely gone for one offering some kind of discount: a two-year fixed-rate or a three-year discounted variable-rate, for instance. Once that initial offer ends, you’ll be automatically put onto your lender’s standard variable rate, known as SVR.
According to data published by Which?, the average SVR in the UK currently stands at 4.9% – significantly higher than the average two-year fixed rate which is about 2.5% – and around a third of all mortgage borrowers are on a lapsed SVR.
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.
Of course, you may want to remortgage even if your deal is not ending any time soon. If that is the case, check if there is an early repayment charge (ERC) and if it’s still worth your while switching to a cheaper deal.
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.
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.
Provided the value of your property has increased since you bought it, you can remortgage and release some of that added value as cash – it is yours, after all.
To release the equity, you’ll need to remortgage the property above the current mortgage amount, which is straightforward seeing as the property is now worth more anyway.
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.
Paying off your mortgage early means you’ll own it completely sooner. The most popular mortgage term is 25 years, but you do not remortgage it for the full 25 years each time. Instead, you remortgage with a term for the amount of time you have left from when you first bought the property.
So, if you got a mortgage with a 25-year term when you first bought the property and you remortgage after two years, the new mortgage will have a 23-year term. Alternatively, if you want to pay off your mortgage earlier than that, you could remortgage with a 20-year term. This will likely mean some larger monthly repayments, but it will mean you’ll save thousands in interest payments and will be debt-free sooner.
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.
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.
You can try and switch to a repayment mortgage with a different lender, but always speak to your current lender first to see what it can do. Even if rates are lower elsewhere, staying with the same lender may mean you can avoid paying hefty set-up fees – it all depends on the individual lender and what it can offer you.
Economic uncertainty also needs to be taken into consideration when remortgaging and with Brexit right around the corner, the economy is more precarious than ever.
The Bank of England base rate has increased twice in two years (from 0.25% to 0.75%) and it’s this rate that sets the standard for all other lending. Even though rates are still historically low, the current climate means they could jump at any time. Locking in a low fixed-rate mortgage now could save you huge amounts in the future.
Last updated: 4 February, 2019
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