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.
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 in brief:
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 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 looking for a new mortgage when your current mortgage deal has around three months to go.
If you don’t find a new deal, you’ll automatically revert onto your lender’s SVR when your promotional period ends, which is often far more expensive than if you’d shopped around for a new fixed rate or discount rate mortgage. In fact, mortgage broker London & Country recently discovered that a third of mortgage customers are on their lender’s SVR.
According to financial data site Moneyfacts, the average two-year fixed rate mortgage in the UK is around 2.52% compared to the average SVR which is 4.9%. Using these figures as examples, if you had a £300,000 repayment mortgage over a 25 year term, your monthly payments would go from £1,349 to £1,736 – that’s an increase of almost £400 each month, or £4,800 per year.
Of course, with Brexit looming the economy is currently somewhat unpredictable, so it could be beneficial to see what mortgage deals are out there even if yours isn’t coming to an end. But don’t forget to look at all the costs because early repayment charges (to leave your mortgage before it ends) and set-up or arrangement fees (payable when you’re setting up a new mortgage) could cancel out the financial benefit of getting a new, low fixed-rate offer.
This need for security is made clear by the fact there has recently been an increase in popularity for longer-term fixes, like five and 10 years as opposed to just two or three. Plus, the similarity between the two-year (2.52%) and five-year (2.93%) rates shows how lenders are reacting to this shift from borrowers and how hard they are trying to remain competitive.
Mortgage analytics specialist at Moneyfacts, Darren Cook, says: “We have seen the margin between the average two-year fixed and five-year fixed rates narrow as competition gathers pace in the five-year fixed rate landscape. Historically, competition on rates has been strong in the two-year fixed rate market and it seems that rates in this sector have been cut to a bare minimum and the five-year fixed rate sector is the next option for mortgage providers to compete in, causing rates to fall.”
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.
When it comes to remortgaging, your loan to value (LTV) is primarily based on the amount of equity in your home – plus, if you have some savings put aside, you can put those into the new mortgage deal as well.
Much in the same way that a larger deposit gives you access to better mortgage rates on your first home, more equity equates to lower 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: 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 debt 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 will have an LTV of 68%, which will give you access to some of the best mortgage rates. If you contributed another £7,500 – from a savings account, perhaps – then your LTV would move down to 65%, where you likely get an even better mortgage rate!
If the value of your property has dipped below your outstanding mortgage debt, you’ll have what’s known as negative equity. For instance: In 2017, you bought a house for £300,000 with a £270,000 mortgage on a two-year fixed-rate deal. The deal is coming to an end, but the property has decreased in value to £250,000.
Most lenders will not allow you change mortgages while you’re in negative equity, so you could end up paying its costly SVR until the property goes up in value.
One way to partially remedy this in the interim is to overpay your mortgage, that is, 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) – but 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.
Last updated: 28 January, 2019
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