Remortgaging: Frequently Asked QuestionsJames Trafford
Taking out a new loan to pay off an old one on your house is known as “remortgaging.” There are numerous reasons why people decide to shop around for a better mortgage deal and remortgage, including:
- Securing a lower interest rate
- Releasing equity from your property
- Change the length of your mortgage term
A remortgaging example to demonstrate how it works
To be clear, when someone takes out a new mortgage loan to pay off their existing mortgage loan on the same property, this is called remortgaging. To illustrate how this works, take a house valued at £250,000, of which the owner has already paid off £150,000. This means that there is still £100,000 left to pay on the loan. If the owner then remortgages, the new loan will pay off the remaining £100,000 that is still owed and will then start paying off the new loan based on the new mortgage deal that they managed to secure with a lender.
Here are some remortgaging statistics to give you an idea of how common it is:
- There were 469,000 homeowner remortgages from July 2018 to June 2019
- Of those mortgages, 231,000 were equity withdrawn remortgages and 238,000 were refinancing remortgages
- The total value of remortgages was more than £84 billion
- On average, there are 39,000 homeowner remortgages every month in the UK
What are the common reasons for remortgaging?
As noted above, everyone has their own unique circumstances and reasons for wanting to remortgage their property, but we can point to some of the more common ones other than the most obvious one to save money.
The fixed-rate mortgage deal is due to end
A fixed-rate mortgage locks in your interest rate for a predetermined period of time (typically 2, 3, or 5 years). In most cases, you’ll be switched to your lender’s typical variable rate (SVR) after your fixed-rate term expires. Because the SVR is often greater than the fixed rate you were paying, your monthly payments will increase.
Remortgaging to another fixed-rate mortgage (or perhaps, depending on your circumstances, a different sort of mortgage) might save you money, depending on the SVR of the lender. Remember that if you decide to switch before your fixed rate expires, you may be subject to additional penalty fees.
To alter how long you have left to pay off the mortgage
When you remortgage, you may have the opportunity to change details like the length of time remaining to pay off your mortgage, which is the motivation for many who decide to remortgage. With a new mortgage deal comes new terms and conditions.
One reason why a homeowner might want to change the length of time left to pay is if their employment situation has changed. For example, if your financial situation improved because you got a promotion and a pay rise, you may wish to pay off your mortgage sooner rather than later. Of course, a shorter period will result in higher monthly repayments.
Conversely, you may be thinking of increasing the length of time you pay off your mortgage so that you will be paying less each month. Although the short-term benefits come with reduced monthly payments, the long-term costs will be significantly higher due to the amount of interest you will be paying.
Changes in your personal circumstances that are significant
Remortgaging your property may be an option if your financial situation or your way of life significantly changes, and you need the extra cash. In the event of a relationship break up, for example, one of you could wish to buy the other out of a property you own with your ex-partner if the two of you break up and decide to sell. This will require a remortgage in which only one party is liable for the debt.
When is the best time to remortgage?
If you know when to remortgage, you may be able to get a better rate and save money. You’ll be charged if you make a switch before the end of a set term, but you may be able to save money if you shop around and consider all of your options. Also note that since then, the pandemic has caused major disruptions to the UK economy, lenders may have significantly altered their mortgage products as a result.
What happens when your current fixed rate mortgage ends?
“A fixed-rate mortgage means that your interest rates and monthly payments are fixed,” noted Jamie Johnson, CEO of FJP Investment. “This type of mortgage,” continues Jamie, “affords the borrower a large degree of certainty, knowing exactly what they will be paying each month and thus helps with budgeting costs, something that is particularly useful when on a tight budget. However, when the fixed rate comes to an end, typically after 2 or 5 years, you will then likely be switched over to the lender’s (often higher) standard variable rate (SVR) mortgage. It is usually here that you may decide to shop around to see if you can get a better deal.”
However, sometimes homeowners may think about remortgaging before the fixed rate comes to an end, and this typically results in having to pay an early repayment charge (ERC). It’s advisable to try and avoid this and instead aim for remortgaging once the fixed-rate term has expired and before the lender’s SVR kicks in.
What about if the current interest rates are low?
In light of the economic consequences of COVID-19, the Bank of England’s base rate dropped to an all-time low of 0.1 percent but has now risen to 0.5 percent. Due to the low interest rates, it may be a good opportunity to re-evaluate your current mortgage plan. However, note that there may be other base rate rises in the near future. This is something you can discuss with a mortgage broker.
Consider your existing situation, especially in terms of your job and financial obligations, before making the leap. Additionally, it’s important to consider the probable cost of switching to ensure that you don’t end up poorer as a result.
Do you remortgage with your existing lender or go with a new one?
This is a question that comes up a lot with homeowners looking to remortgage. It is entirely up to you; you do not have to remain with your current lender and are therefore entitled to shop around for the best deal you can find. However, when you do shop around, don’t forget to ask your current provider what they are willing to offer you because they may end up offering you the best deal on the table.
If it happens that your lender switches you to a “product transfer,” this is not the same thing as a remortgage; it is merely a change in mortgage product with your existing lender. It may be tempting to do this to avoid the hassle and time of remortgaging with another lender, but it’s still available to shop around because a better deal may be found elsewhere.
If you need help and advice on whether to switch to a different lender, you can always use the services of a mortgage broker, who will analyse your situation and see if they can find you a better deal. If you decide against using a mortgage broker, then you should still see what other deals lenders have on the table.