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When should I remortgage?

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Written by Sarah Guershon

Remortgaging is when you get a new mortgage on your current home. It’s a very important decision that could impact your finances by thousands of pounds every year.

Why should I remortgage?

Before you look at the when, you need to first consider the why. 

Why should you remortgage if you can afford the monthly repayments, are happy with your lender and are not planning to move house?

We go into this in detail in our Should I remortgage? guide, but the most common reasons are:

  1. Your current deal is about to end/has already ended (which most likely means you’ll be on your lender’s costly standard variable rate, known as SVR)

  2. You want to save money

  3. You want to release some of the equity in your home to make changes to it, like renovations or an extension

  4. You want to pay off your mortgage earlier

  5. The value of your property has gone up significantly

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

  7. Economic uncertainty

When should I remortgage?

In general, you should start looking for a new mortgage around three months before the end of your current mortgage’s promotional deal. 

For example, if you have a three-year fixed rate mortgage, you should start shopping around for a new fixed rate or discount rate mortgage when you’re 33 months into the 36-month promotional period.

When a lender offers you a mortgage, you usually have between three and six months to accept it – after that, you’ll have to reapply. That’s why you should start your search when your current mortgage deal has around three months to go.

Standard Variable Rate (SVR)

If you don’t find a new deal, you’ll automatically revert onto your lender’s SVR when your promotional period ends. Indeed, this is all too common a scenario as mortgage broker London & Country recently discovered that a third of mortgage customers are on their lender’s SVR.

But while this may sound alright in principle, in reality the SVR is usually at least 2% higher than the rate you are currently paying - which will make your monthly payments leap upwards. Do you really want to spend more money on mortgage payments for the sake of doing a little research?

According to financial data site Moneyfacts, the average two-year fixed-rate mortgage in the UK has hit a historic low of just 2.09% compared to the average SVR which is 4.76%. 

So, say for argument’s sake you had a £300,000 repayment mortgage over a 25-year term at 2.09% and reverted to an SVR of 4.76%. Your payments would rocket from £1,284 to £1,712 per month – that’s an increase of £428 each month, or £5,136 per year!

Calculate your monthly mortgage repayments

Of course, with the coronavirus (COVID-19) pandemic and Brexit looming the economy is currently somewhat unpredictable. 

However, with the Bank of England base rate currently at just 0.1%, mortgage deals are cheaper than ever, making it a great time to remortgage and save money, if your current deal is ending.

Early Repayment Charges

However, it’s essential to look at all the costs involved. 

If you leave your mortgage deal before it finishes, you could end up paying early repayment charges

What’s more, expensive set-up or arrangement fees (payable when taking out a new mortgage) could cancel out the financial benefit of getting a new, low fixed-rate offer. 

Look at the Annual Percentage Rate of Charge (APRC) which shows the total cost of the mortgage, including fees, across the whole term.

How long should I remortgage for?

How long you decide to fix a new mortgage deal for is another question to consider.

Moneyfacts has recognised that the fall in the base rate in March has contributed to the fall in average mortgage rates in 2020, with the average 2-year fixed mortgage rate having dropped by 0.06% from March 11 to March 31. 

Average 5-year fixed rate mortgages fell by 0.05% to 2.35% during the same period, and the average SVR saw a fall of 0.14% - the biggest drop of all.

Moneyfacts finance expert Eleanor Williams commented that “the recent withdrawal of many higher LTV mortgage products and home purchase products is hopefully a temporary measure, while lenders reassess risk in this area of the market and work out what it will be possible for them to offer while the current restrictions are in place.”

She added “With so much uncertainty at the moment, providers seem to initially be focusing on the support that their existing customers may need in the coming weeks.”

However, she was quick to point out that “borrowers sitting on their provider’s standard variable rate (SVR) waiting to see what the impact of these rate cuts will be” would benefit from switching to a new deal while rates are low (if eligible). 

Switching may also protect these customers from interest rate volatility in the future. 

Eleanor also believes “We have to hope now that the mortgage market is able to rebound as quickly as we have seen it contract, once we begin to come out the other side of the Covid-19 crisis.”

Fixing your mortgage for longer not only means you have prolonged certainty when it comes to your payments, but it also means you will not need to think about changing your mortgage for longer periods of time. 

However, if you’re unsure whether or not you’ll remain in your current property for the length of the new mortgage deal, make sure it has the added bonus of being portable, which means you can take it from one property to another without (or with minimal) fees.

How to get the best remortgage deals

With so many mortgage deals out there, it can pay to talk to a “whole of market” mortgage broker. 

A broker can easily compare almost all of the mortgages available to first time buyers, 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.

Remortgaging and LTV

When it comes to remortgaging, you’ll need to know your loan to value (LTV) ratio. This is the ratio between how much you need to borrow in relation to how much your property is worth.

Your LTV is the single most important factor when it comes to deciding what interest rates a mortgage lender will offer.

Much in the same way that a larger deposit gives you access to better mortgage rates on your first home, more equity and a lower LTV equates to cheaper interest rates. 

If you have a repayment mortgage, and the value of your home has stayed the same or gone up, you should have a decent chunk of equity in your home.

For example: 

Say you originally bought a £200,000 property with a £20,000 deposit – i.e. you borrowed £180,000 at an LTV of 90%. 

Since then, your property has increased in value to £250,000. You’ve also paid off £10,000 of your mortgage debt through your monthly repayments, so you only owe the lender £170,000. 

This means your total equity in your home is now £80,000: £20,000 from the deposit, plus £10,000 in mortgage repayments, and a final £50,000 from the increase in property value.

With £80,000 in equity on a £250,000 home, and only £170,000 left to repay, you’re in a very strong position for remortgaging. You now have an LTV of 68%, which will give you access to some of the best mortgage rates on the market.  

What’s more, if you could contribute another £7,500 – from a savings account, perhaps – then your LTV would drop further down to 65%, where you likely get an even better mortgage rate!

Why can’t I remortgage?

Negative equity

If the value of your property has dipped below your outstanding mortgage debt, you’ll have what’s known as negative equity. 

For example: 

In 2017, you bought a house for £300,000 with a £270,000 mortgage on a two-year fixed-rate deal. 

That deal is now coming to an end, but the property has decreased in value to £250,000. You now owe more than the property is worth and are thus in negative equity.

Most lenders will not allow you to change mortgages while you’re in negative equity, so you could end up paying its costly SVR until the property goes up in value.

Overpaying your mortgage

One way to partially remedy this in the interim is to overpay your mortgage. This means you make payments over the monthly requirements. 

Generally speaking, this should be doable if you’re already on the lender’s SVR (higher rates usually mean greater flexibility). 

However, if you’re in negative equity whilst on a fixed-rate deal, you must check the terms and conditions before you overpay. Although most fixed-rate deals allow you to overpay by 10% per year, they’ll charge you a penalty for anything over that.

Try to remortgage to a cheaper deal as soon as you’re out of negative equity.