Remortgaging is something that almost all mortgage borrowers have to do at some stage, apart from those with enough money to pay off the entire loan or borrowers who choose long-term fixed-rate mortgages.
Many borrowers remortgage every few years to get the best rates, but following the housing crash, many lenders have tightened up their requirements for remortgages and homeowners may need to own a certain amount of their property before a deal can be approved.
Most homeowners remortgage when their current mortgage deal has come to an end or when they need to move house. But others do so to take out a bigger mortgage, which in turn helps to pay for home improvements or extensions.
Reasons for remortgaging
- Your current mortgage deal is ending
- You want to get a better interest rate
- You're moving house
- You need to borrow more
If your previous mortgage deal is coming to an end, you'll automatically be put onto your lender's Standard Variable Rate (SVR). However, this may not be terribly competitive and as a result, you'll need to check there's not a better mortgage deal out there for you.
That said, an odd quirk of the recent recession and the low Bank of England base rate has been that some SVRs have actually been competitive deals for homeowners and as a result, many borrowers have simply stayed put rather than going to the hassle of remortgaging.
But this is a fairly risky option. SVRs are not only influenced by what base rate is doing. The LIBOR rate (London Interbank Offered Rate) can also have an impact on SVRs – this is the average interest rate that major banks in London charge when lending to other banks. If the LIBOR rate goes up, it becomes more expensive for lenders to borrow money so lenders pass this onto their customers through the SVR. Recently, SVRs have started to climb which means mortgage repayments are also going up, leaving some people out of pocket. As a result, some borrowers will now need to remortgage.
For the most part, you will pay less on your monthly interest if you remortgage. Some homeowners also choose to remortgage in a bid to consolidate all their debt, as interest repayments on mortgages tend to be lower than other types of debt. However, you should be aware that this could significantly increase the cost of your monthly repayments and probably increase the term of your mortgage, so you shouldn't get into the habit of remortgaging simply to pay for unnecessary spending.
If your current deal is coming to an end, scour the market to see if there is another attractive deal out there for you. Remember to start looking early - you can generally reserve a rate between three and six months in advance. Don't forget to factor the arrangement fee into the equation – these can range from £500 to £2,000.
EXAMPLE: Why remortgaging makes sense
You are coming to an end of a deal with £175,000 left on your mortgage. Your lender puts you on its SVR charging 5%
- If you stay on this, your repayments will be £1,023 if repaying capital and interest.
- However, if you remortgage to a new fixed-rate deal offering 3%, your monthly cost will be £830
- This represents a monthly saving of £193 or a total saving of £4,632 if the deal is for two years.
Even if the new deal comes with a product fee of £999, you still stand to save £3,633 over two years.
In some cases, it can be worth remortgaging even if your current deal hasn't yet come to an end. Interest rates are extremely competitive right now and if you locked into a fixed-rate mortgage a few years back, you may find it's worth switching to a better deal. However, many lenders charge an early repayment fee if you want to get out of your current deal. So if you've got a five-year fixed-rate mortgage but you want to remortgage after year three, you could be charged for the privilege. In some cases, these fees are as high as 5% of the outstanding mortgage debt - if you had £175,000 left on your mortgage, this would be as much as £8,750. Don't forget to also factor in the arrangement fee you'll probably have to pay on your new mortgage and legal and valuation fees.
You therefore need to think carefully before deciding whether remortgaging is definitely a good option. While interest rates are low, it can make sense to pay to get out of your current deal if the rate you are paying is very uncompetitive and then remortgage onto a much lower rate. But you should seek advice from a fee-free mortgage broker before deciding if this is the best way to go.
- When remortgaging, always compare fees as well as interest rate
- Seek advice from a fee-free broker if you're unsure
- Remember the SVR can go up or down at any time
Watch out for early repayment charges on your current mortgage if you're looking to remortgage to a better deal
Rather take out an interest-only deal, consider saving for a while longer to increase your deposit and lower your repayments