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Guide to Remortgaging

Anyone who has applied for a mortgage will know that it can be quite a long process to finalise. There is much paperwork to gather and check, spending habits to scrutinise and fees to be paid.

Once the transfer of your first mortgage is complete, however, this does not automatically mean ‘plain sailing’ for borrowers. For many people, fixing a rate of interest for a few years only is a good option. But at the end of that set period, homeowners need to ask themselves;

Do I stay with my existing mortgage lender, or do I go?

This post will take you through some of the things you need to consider if you want to find the best remortgage deals for you.

Why You Should Consider Remortgaging your Home

• To Save Money – A benefit of remortgaging for many, is the opportunity to save money on their monthly mortgage repayments, so that they may raise some extra cash for a whole host of things, like home renovations. Or even save for a deposit to buy a Buy to Let property. See more on remortgaging to get a buy to let property at the end of this article.
• To Enjoy Greater Mortgage Flexibility – Changing mortgage deals can unlock greater flexibility in how your mortgage is paid. For example, you may be able to find a lender that will allow you to overpay on your mortgage some months, should you need to take a ‘payment holiday’ (skip a payment), without facing any repercussions at a later date. Further, if you have thousands in savings, you may want to switch to an offset mortgage, where your savings are offset against the interest owed on your mortgage.
• Make Most of Rising Home Value – With property prices still rising, many homeowners may find that their home has increased in value since they bought it. By taking out a mortgage with a lower loan to value ratio, you can access lower interest rates and have more choice on what lender/lending options to opt for.
• To Pay Your Mortgage Off Quicker – Switching to a lower interest rate on your mortgage could mean that you pay it off faster.
• To Consolidate Debts – Mortgage interest rates are often cheaper than interest rates paid on credit cards. When taking out a new mortgage, you could increase your mortgage payments (provided it is still affordable for you) and consolidate your debts. Seeking impartial advice for this is greatly recommended, as you could risk losing your home if you can’t keep up your mortgage repayments.

What are the Downsides to Remortgaging?

Despite the benefits of remortgaging your home, there are some downsides to consider before making any applications for a new mortgage. These include;

• Early Redemption Penalties – For those on fixed rate, discount or capped mortgages, switching mortgages before the allotted period has elapsed will, in many cases, incur an early redemption charge. For most loans, this could mean you have to pay a few months’ worth of interest in order to exit your current mortgage. If you opted for a cashback mortgage, this may apply too, as well as the added cost of repaying some of the cash you were granted for taking out the agreement. In order to avoid the early redemption charges, you can choose to be patient and wait until the penalty period has elapsed.
• Details in the Fine Print – Remortgaging is a huge market, so lenders will compete fiercely to snatch your business away from other lenders. Enticing offers like discounted periods can seem appealing, but there may be high early redemption charges for exiting. This is why it is vital to read the fine print of a mortgage deal, before applying.
• High SVR Rates – When it comes to remortgaging, it is important to compare the would-be lender’s standard variable rate, as well as the mortgage interest rates on offer. Once your fixed mortgage period is over, you may be automatically switched to the SVR rate, which may be a lot higher than SVR rates offered elsewhere. Make sure you factor this into your own affordability calculations before applying.
• Longer Mortgage, More Interest Paid – If you are thinking about remortgaging to consolidate debts, please bear in mind that although you are lowering your monthly repayments, in the long-term you are extending your mortgage period and paying more in interest.

How to Remortgage: Step One- Consider your Circumstances

The first and most important step in remortgaging is reviewing your current finances and deciding from there if remortgaging is a good idea, and what kind of deal would best suit your needs.

Ask yourself, do I want to save money in the long-run, pay off my mortgage quicker, make lower monthly repayments, have more flexibility on payments or finance renovations?

After you have done this, try speaking to an independent mortgage advisor. They will be able to tell you what options are available to you and most importantly, how much they will cost.

Quick Tip: It is a good idea to start thinking about a new mortgage a few months before your current deal ends. The application and legal process can take a few weeks to finalise and you ideally want to move seamlessly into the new deal, with no switch to your current lender’s standard variable rate.

A mortgage broker will also be frank, if they feel like your circumstances are not ideal for remortgaging at this time, they will tell you. Take a look at the example below to compare two scenarios. One, where remortgaging is a good idea and another, where remortgaging costs more than the potential savings yielded from getting a new deal.

Let’s Look at a Remortgage Example;

Graham is nearing the end of his mortgage term. He has three years to go and an outstanding balance of £14,000. His current rate is 4%, but he has seen a mortgage offering 3% and he is considering a switch to this new deal. The cost of exiting his mortgage is £500 and the difference in interest payment would be £140. As this saving is less than the cost of a remortgage, it is advisable for Graham to stick with his mortgage until the end.

Elaine has five years left on her mortgage and an outstanding balance of £61,000. She is also currently on a 4% rate and she has seen the same 3% deal advertised as Graham. She is also considering a switch in plans. The cost of the legal work, survey and exit fee from her current deal is also £500. However, with the amount outstanding on her loan and the potential saving she could make (£610), Elaine would benefit from remortgaging.

Step Two – Approach your Lender

If you have sought advice, shopped around and spotted a good mortgage deal, inform your lender and find out if they can offer you a similar mortgage product. If they can, you could potentially save some money in the application process.

If they, for whatever reason, cannot match your preferred mortgage deal, it may be advisable to switch, if possible.

Step Three – Mortgage Application

If you took out your mortgage before the financial crash of 2007, and haven’t refinanced since you may not have noticed that lenders are now a lot stricter in approving loans. For example, if you are self-employed, you can no longer declare your income, you will need to show proof. ‘Stress Tests’ are also strictly enforced. This is where lenders test your ability to pay a mortgage in difficult financial circumstances (e.g. sudden redundancy, pregnancy, rising interest rates etc…). If you do not meet their lending criteria, a ‘hard footprint’ is left on your credit report. Too many hard footprints and mortgage rejections may start to have a negative effect on your credit score.

This is another reason why seeking independent advice can be helpful. Brokers will make the application for you, which means if they don’t think you are suitable, they will not process the application on your behalf. Saving you time and potential missteps in your credit report.  

Read more in our Benefits of Using Brokers Guide for more on how they can help. When making applications, it may also be helpful to look at guides to improving your credit rating. This guide to applying for your first mortgage also provides information on the costs of taking out a mortgage and what paperwork is required.

Step Four – Home Valuation and Completion

Once an application for a mortgage is submitted, the lender will send a valuator, to assess how much your home is worth. It is at this stage that you will need to inform your solicitor or legal representative and tell them that you’re remortgaging. Once you have been approved by the lender, you will be sent a mortgage agreement in principle. You will then have to pay the fees (if applicable) and pay your solicitor/conveyancer/ broker for arranging the new mortgage on your behalf.

After this, you will receive a mortgage completion statement, with any new funds added to your mortgage loan.

Remortgaging For Buy to Let Properties

One of the benefits of remortgaging is the option to release money for further investment, such as buying a home outright, to rent out, or placing a deposit on a buy to let property in order to secure a suitable mortgage.

What are the Benefits of Remortgaging to Invest in Buy to Let?

• Using Equity – If you have enough equity in your home, remortgaging can give you enough funds to purchase a buy to let.
• Rising Rental Prices – In terms of making an investment, at the time of writing, rents are increasing, giving landlords the opportunity of capitalising on the shortage of housing in the UK. There is a chance that this could change in the future, but for now at least, while interest rates are low for savings, becoming a landlord is one way to turn a profit from property.

Let’s Look at a Remortgaging for Buy to Let Example;

Jacob has paid £100,000 of his mortgage and has £100,000 outstanding. His home has increased in value by £50,000 and so the equity is valued at £150,000. Jacob has the option to remortgage for £250,000 to buy a buy to let property, still owing £100,000 in his mortgage.

What are the Pitfalls of Remortgaging to Purchase a Buy to Let Property?

• Borrowing More Money – As you are extending your mortgage, the amount you will pay in interest will be higher. If you are considering a remortgage to get a buy to let, you may find yourself requesting a high percentage of the buy to let property’s value.
• Affordability – When taking out two mortgages to invest in buy to let, you will need to pass two lender affordability checks. Your income will need to be high enough to support your existing mortgage as well as a buy to let mortgage, ensuring that you can cover rent, mortgage and tax repayments, with your income alone. It is highly recommended you also have a good deal of savings as a contingency.  
• 25% Minimum Deposit – You will need at least a 25% deposit to access most buy to let mortgages.
• Long Term Commitment – If you wish to become a first-time landlord, bear in mind that this is a long-term investment rather than a quick fix. It will cost you money to achieve and money to leave this kind of deal, so potential investors would be wise to seek independent financial advice beforehand.
• Costs – Taking out a mortgage of any type costs money (potentially thousands). You may have to pay early redemption charges as well as legal, letting agent and mortgage admin fees. Not to mention tax on the buy to let income you receive, stamp duty (at resale) capital gains tax and insurance to protect your tenants.

Remortgaging is a long process, but for millions of people, the extra effort is worth it. To get the ball rolling, get in touch with an independent mortgage advisor. They offer a free no-obligation quote, so what are you waiting for?