Mortgages can seem complex – and if you know that you are likely on a less than amazing interest rate, or want to borrow against your equity, remortgaging might seem like a minefield!
The reality is that remortgages are not complex, and an experienced broker can steer you through the comparisons and decision-making so you can make confident product choices.
In essence, a remortgage means:
- Taking out a new borrowing product to repay your existing mortgage.
- That could be a new product with the same lender or a loan from a different mortgage provider.
- If you increase the amount you are borrowing, you can repay your current debt and retain a cash balance to use as you wish.
There are lots of pros and cons to consider, as well as timing issues that make a significant difference to your costs.
We will run through these shortly so you have a complete understanding of what a remortgage involves!
Common Reasons to Remortgage
So, if you have a mortgage, your payments go out automatically, and you have not had any particular issue with your lender, why would you go to the trouble of applying for a new loan?
There are several excellent reasons to remortgage, with compelling benefits:
To lower your mortgage costs
Fixed-term mortgages switch over to the lender’s Standard Variable Rate at the term-end, which can be costly.
Remortgaging can mean you access a far lower interest rate and reduce your monthly outgoings.
To change your mortgage structure
If you have an interest-only mortgage, you might want to swap that for a repayment product and start making capital repayments.
Interest-only is appealing due to the lower payment values but means you are not paying down any of the original sum borrowed.
To borrow at a low cost
Mortgages are among the cheapest borrowing products available because the lender has a hugely reduced risk compared to an unsecured loan or a short-term credit card.
If you need finances to consolidate debts, buy a car, go on holiday or carry out property improvements, a remortgage can release the equity tied up in your property.
To find a more flexible mortgage
Flexible mortgages permit extra payments when you have additional income and even pauses in repayments to cater to variable income structures.
If you want more flexibility to change your payments from month to month, you could remortgage to a new product with this feature.
How Does Equity Ownership Impact My Remortgage Prospects?
If we pause for a second to talk about equity, that all might make more sense. Over time, your equity (the amount of your home you own outright) increases.
Your property will gradually grow in value, and each mortgage repayment you make pays back a fraction of the debt, so there is less borrowing secured on your home.
When you remortgage, the lender will look at the maximum Loan to Value (LTV) ratio, so if you have a home worth £400,000 and a mortgage with a £200,000 outstanding balance, you own £200,000 equity.
Lenders might have an LTV limit of, say, 85%, so you could potentially remortgage up to £340,000.
That would mean paying back the current £200,000 and releasing £140,000 from the equity for other purposes.
How Does a Remortgage Application Work in Practise?
Remortgaging does not necessarily mean taking on more debt, and you can borrow the same balance you already owe but at a more competitive interest rate.
The process is likely much more straightforward than you might think, but we usually recommend leaving around six months of breathing room if you are approaching the end of a fixed-rate mortgage.
Remortgaging With the Same Provider
If you stay with your current lender, it is a case of transferring your debt from one product to another.
The lender already knows all about you and your home, so there should not usually be any need for additional legal work (or costs!). The lender deals with the paperwork, so you sign the agreement and see a reduced monthly repayment.
Remortgaging to Switch Lenders
Switching to a different mortgage provider is a bit more involved because you need to collate all the information you required for your original mortgage, including:
- Income and earnings paperwork.
- Personal and financial information.
- Debt and credit record details.
Because you are a new customer to the lender, they will run through credit history checks and affordability assessments before they can make you an offer.
It might be worth hiring a conveyancer to deal with the remortgage paperwork. Some products come with an offer of free fees, but we would recommend caution since no-fee normally means a very slow service that may not be in your interest.
Once you have been offered a remortgage you are happy with, you sign the documents and the new lender deals with the repayment and setting up your new monthly payments.
Remortgaging to a new lender should take around four to eight weeks, but it can save a substantial amount of money in the long run.
How Can I Remortgage to Raise a Cash Lump Sum?
We talked about releasing equity a little earlier, so we will not go back over the basics, but you can very likely raise finances against your property if you have had your mortgage for several years.
Lenders will not be interested in what you originally paid, but:
- How much your property is worth now.
- How much you still owe on your current debt.
- How easy it would be to sell the property in a repossession scenario.
You can sell a property to release cash, but remortgaging may be the solution if you are not keen on moving.
Note that your higher borrowing amount will mean higher monthly repayments. Still, you can also use a remortgage to pay off other debts, consolidating your liabilities into one longer-term, lower-interest loan.
Questions to Consider Before You Apply for a Remortgage
Remortgaging may seem like a long-winded, stressful experience. Still, if you have thought your decisions through and have a clear idea about why you want to remortgage or what you want to do with equity released, it should be fairly uncomplicated.
Before you start looking at rates or comparing fees, work through several questions.
Do I Have a Reasonable Enough Credit Score to Qualify for a Remortgage Product?
If you are thinking about switching to a different product with the same lender, your credit score is less of a concern since the provider will already be familiar with your finances.
A new remortgage product means that the new lender will need to check for any adverse credit problems that impact your eligibility for a loan.
Low credit and bad debt issues can make things difficult, so it is wise to access copies of your credit reports from all three of the big UK credit bureaus (TransUnion, Equifax and Experian) to ensure they are up to date.
You can address errors or inconsistencies, repay small outstanding amounts of debt, register to vote and close unused credit accounts to give your score a boost.
Do I Earn Enough to Justify the Remortgage Value I Want to Apply For?
Lenders will normally take your annual income and multiply it by four or five to determine the maximum amount they will lend.
Even if the amount you apply for is far below the market value of your home, you may struggle to find remortgage approval if your annual salary is not sufficient.
For example, if you earn £30,000 and want to borrow £400,000, a lender with a four times salary policy can only offer you a mortgage of £120,000, so your application will be rejected.
Another consideration is any change to your employment status.
If you are in a new job or within a probation period, it may be perceived as a riskier application, meaning higher interest rates.
Self-employed applicants are normally advised to wait one or two years before remortgaging since a lender will require at least a couple of years of trading accounts to conduct an affordability assessment.
Are There Costs Involved With Remortgaging?
The number one rule of remortgaging is to check your existing mortgage agreement before doing anything!
Exit penalties and early repayment fees can be extremely costly, so you need to know about any charges associated with terminating your existing mortgage.
Is Remortgaging Right for Me?
Your mortgage is probably the largest amount of borrowing you will ever take out and the highest debt repayment you make each month – so making informed decisions is crucial.
Remortgaging may transform your finances or make it possible to invest in a new car, build a conversion, or cover family expenses by utilising the equity ownership you have built up.
However, many other potential borrowing products could meet your needs, and if you have any exit penalties, it is vital to compare the costs and assess the right course of action.
If you are interested in remortgaging or unsure whether it is the best option, please get in touch with Think Plutus. As highly experienced private brokers, we will work through the choices available and help you make clear, confident decisions to protect your financial future.